As filed with the Securities and Exchange Commission on February 2, 2000
1940 Act File No. 811-07359
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 1 [X]
(Check appropriate box or boxes)
LEND LEASE HYPERION HIGH-YIELD
CMBS FUND, INC.
(Exact Name of Registrant as Specified in Charter)
c/o Lend Lease Hyperion Capital Advisors, L.L.C.
One Liberty Plaza, New York, New York 10006-1404
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 549-8400
Clifford E. Lai
Lend Lease Hyperion Capital Advisors, L.L.C.
One Liberty Plaza
New York, New York 10006-1404
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(Name and Address of Agent for Service)
Copy to: MICHAEL R. ROSELLA, Esq.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
275060.2
<PAGE>
Subject to Completion dated February 2, 2000
PRIVATE PLACEMENT MEMORANDUM NAME OF OFFEREE ____________________
February , 2000
20,000,000 Shares
LEND LEASE HYPERION HIGH-YIELD
CMBS FUND, INC.
Common Stock
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Lend Lease Hyperion High-Yield CMBS Fund, Inc. (the "Fund") is a
non-diversified closed-end management investment company whose investment
objective is to provide high total return by investing in securities backed by
real estate debt. The Fund will seek to achieve its objective by investing,
under normal circumstances, at least 65% of its assets in below investment grade
commercial mortgage-backed securities ("CMBS"). Investments in below investment
grade securities are considered to be speculative and may be subject to special
risks. Such special risks include greater risk of loss of principal and
potential for non-payment of interest when compared with most other types of
investments. The loss of the money invested is a risk of the Fund. There is no
assurance that the Fund will achieve its investment objective. The Fund expects
to distribute in cash all of its net assets on or before December 31, 2001, and
immediately thereafter to terminate, provided that the duration of the Fund may
be extended for successive one-year periods provided that each continuance is
specifically approved in advance by the holders of more than 75% of the
outstanding shares of the Fund's Common Stock. Notwithstanding the foregoing,
the Fund may be liquidated at any time subject to the unanimous consent of the
shareholders. Investors should carefully assess the risks associated with an
investment in the Fund including the risk that the Fund may acquire rights of
equity in real estate through its holdings. The management and disposition of
these equity interests may pose additional risks to the principal investments of
the Fund. Investment in the Fund involves risk and is suitable only for
qualified investors of substantial financial resources who have no need for
liquidity in their investment and who can bear the risk of losing their
investment. See "Private Placement Memorandum Summary" and "The Fund and its
Objective, Policies, and Risks."
Lend Lease Hyperion Capital Advisors, L.L.C. is the Fund's investment
adviser (the "Adviser"). The Adviser is a registered investment adviser. The
Fund's administrator is Hyperion Capital Management, Inc. (the "Administrator").
The address of the Adviser, the Fund and the Administrator is One Liberty Plaza,
New York, New York 10006 and its telephone number is (212) 549-8400.
The minimum purchase in the offering is $1 million (100,000 shares)(except
for purchases by the Advisor and its affiliates). The minimum offering size of
the Fund is $40 million and the maximum offering size is $200 million. The
shares of the Fund will be offered and sold primarily through Lend Lease Capital
Markets, Inc. Lend Lease Capital Markets, Inc.'s address and telephone number
are 3424 Peachtree Road., N.E., Suite 800, Atlanta, Georgia 30326, and
(404)848-8600, respectively. The Fund may also offer and sell its shares through
other broker-dealers, that are members of the National Association of Securities
Dealers, Inc. No fees or commissions will be paid for selling Fund shares.
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Price to Sales Proceeds to
Investors Load Fund(1)
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Per Share............... $10.00 $ 0 $10.00
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Total Minimum
(4,000,000 shares)...... $40,000,000 $ 0 $40,000,000.00
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Total Maximum $200,000,000.00 $ 0 $200,000,000.00
(20,000,000 shares).....
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(1) Before deducting offering expenses payable by the Fund estimated at
$50,000. These expenses will be charged as expenses against the assets of
the Fund. See "Use of Proceeds."
The Private Placement Memorandum sets forth concisely information about
the Fund that a prospective investor ought to know before investing. Investors
are advised to read this Private Placement Memorandum carefully and retain it
for future reference. A Statement of Additional Information dated February__,
2000 ("SAI") about the Fund has been filed with the Securities and Exchange
Commission and is available, without charge, upon writing or calling the Fund at
the above location. The SAI has been incorporated by reference into this Private
Placement Memorandum.
THIS PRIVATE PLACEMENT MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
BY OR TO ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. THIS PRIVATE PLACEMENT MEMORANDUM CONSTITUTES AN OFFER ONLY TO NAMED,
QUALIFIED OFFEREES.
274828.19
<PAGE>
Table of Contents Page
Private Placement Memorandum Summary...........................................4
Fund Termination...............................................................5
Risk Considerations............................................................6
Summary of the Fund's Expenses.................................................8
Use of Proceeds................................................................9
The Fund and its Objective, Policies and Risks.................................9
Management of the Fund........................................................23
Dividends and Distributions...................................................26
Reinvestment of Dividends.....................................................26
Determination of Net Asset Value..............................................26
Capital Stock of the Fund.....................................................27
Taxes ...................................................................29
Validity of Shares............................................................32
Experts ...................................................................32
Reports to Shareholders.......................................................32
Further Information...........................................................33
Description of Ratings................................................Appendix A
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THE SHARES OF COMMON STOCK HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "1933 ACT"), IN RELIANCE UPON THE EXEMPTION PROVIDED BY
SECTION 4(2) OF THE ACT AND REGULATION D THEREUNDER. THE SHARES OF COMMON STOCK
HAVE NOT BEEN REGISTERED UNDER ANY STATE SECURITIES LAWS IN RELIANCE UPON
VARIOUS EXEMPTIONS PROVIDED BY THOSE LAWS. THE SHARES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY ANY REGULATORY AUTHORITY NOR HAS ANY REGULATORY AUTHORITY PASSED
ON THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THIS PRIVATE
PLACEMENT MEMORANDUM. THE SHARES ARE BEING OFFERED TO A LIMITED NUMBER OF
QUALIFIED PERSONS WHO WILL PURCHASE THE SHARES FOR THEIR OWN ACCOUNTS, PRIMARILY
"ACCREDITED INVESTORS" PURSUANT TO REGULATION D OF THE 1933 ACT, AND OTHER
SIMILARLY QUALIFIED INVESTORS. THE SHARES MAY NOT BE TRANSFERRED OR RESOLD
EXCEPT AS PERMITTED UNDER THE 1933 ACT AND THE SECURITIES LAWS OF THE STATES IN
WHICH THE SHARES ARE SOLD PURSUANT TO REGISTRATION UNDER THE 1933 ACT OR SUCH
LAWS OR EXEMPTIONS THEREFROM. NO PUBLIC MARKET FOR THE SHARES NOW EXISTS OR IS
ANTICIPATED TO DEVELOP. AN INVESTMENT IN THE SHARES IS NOT SUITABLE FOR ANY
PERSON REQUIRING INVESTMENT LIQUIDITY.
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FOR RESIDENTS OF ALL STATES:
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF
THE LEND LEASE HYPERION HIGH-YIELD CMBS FUND, INC. AND THE TERMS OF THIS
OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE SHARES OFFERED HEREBY
HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR
REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED
THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OFFERED HEREBY ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE 1933
ACT, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.
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274828.19
<PAGE>
FOR FLORIDA RESIDENTS:
THE SHARES OFFERED HEREBY WILL BE SOLD TO, AND ACQUIRED BY, THE PURCHASER IN A
TRANSACTION EXEMPT UNDER SECTION 517.061(11) OF THE FLORIDA SECURITIES AND
INVESTOR PROTECTION ACT. THAT SECTION PROVIDES THAT WHEN SALES ARE MADE TO FIVE
OR MORE PERSONS, ANY SALE MADE PURSUANT TO SUCH SECTION IS VOIDABLE AT THE
OPTION OF THE PURCHASER WITHIN THREE (3) DAYS AFTER THE FIRST TENDER OF
CONSIDERATION IS MADE BY SUCH PURCHASER TO THE ISSUER, AN AGENT OF THE ISSUER,
OR AN ESCROW AGENT OR WITHIN THREE (3) DAYS AFTER THE AVAILABILITY OF THAT
PRIVILEGE IS COMMUNICATED TO SUCH PURCHASER, WHICHEVER OCCURS LATER.
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274828.19
<PAGE>
PRIVATE PLACEMENT MEMORANDUM SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information included elsewhere in this Private Placement
Memorandum. Investors should carefully consider the information set forth under
the heading "Risk Considerations" in this Private Placement Memorandum Summary.
The Fund Lend Lease Hyperion High-Yield CMBS Fund, Inc. (the
"Fund") is a non-diversified closed-end management
investment company. The Fund expects to distribute in
cash all of its net assets on or before December 31,
2001, and immediately thereafter to terminate,
provided that the duration of the Fund may be extended
for successive one-year periods provided that each
continuance is specifically approved in advance by the
holders of more than 75% of the outstanding shares of
the Fund's Common Stock. Notwithstanding the
foregoing, the Fund may be liquidated at any time upon
the unanimous consent of the shareholders. See "The
Fund and its Objective, Policies and Risks."
The Offering The Fund is initially offering a minimum of 4,000,000
shares (gross proceeds of $40,000,000) and a maximum
of 20 million shares (gross proceeds of $200,000,000)
of common stock ("Common Stock" or "Shares") at an
offering price of $10.00 per share. The Fund may offer
additional Shares at the then current net asset value
subsequent to the close of the initial offering
period. Approval of the holders of more than 75% of
the outstanding shares of the Fund's Common Stock is
required prior to the offering of additional shares of
the Fund. See "Dividends and Distribution" and
"Capital Stock of the Fund."
Investment Objective
and Policies The Fund's investment objective is to provide high
total return by investing in securities backed by real
estate debt. No assurance can be given that the Fund's
objective will be achieved. See "Investment
Objective."
The Fund will seek to achieve its objective by
investing, under normal circumstances, primarily in
below investment grade commercial mortgage-backed
securities which represent interests in or are secured
by mortgage loans on commercial real property, such as
industrial and warehouse properties, office buildings,
retail space and shopping malls, single and
multifamily properties and cooperative apartments,
hotels and motels, nursing homes, hospitals and senior
living centers, mobile home parks, manufactured home
communities, theaters, self-storage facilities,
restaurants and convenience stores ("Commercial
Mortgage-Backed Securities" or "CMBS"). Under normal
market conditions, at least 65% of the Fund's assets
will be invested in below investment grade CMBS. The
Fund's portfolio is expected to consist primarily of
securities with stated maturities of 2-20 years. See
"Commercial Mortgage-Backed Securities."
The Fund may also invest in other mortgage-related
securities or assets, including commercial mortgage
loans ("Commercial Mortgage Loans"), mezzanine capital
in real estate financed transactions ("Mezzanine
Capital"), and debt securities of real estate
investment trusts ("REITs"), as well as securities
issued by the U.S. Treasury. The Fund may also invest
in Fannie
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274828.19
<PAGE>
Mae Multifamily MBS/DUS (Delegated Underwriting and
Servicing Mortgage-Backed Securities). Additionally,
the Fund reserves the right to invest without
limitation in money market instruments for temporary
defensive purposes.
Investment Adviser Lend Lease Hyperion Capital Advisors, L.L.C. (the
"Adviser") will act as the Fund's investment adviser.
The Fund will pay the Adviser a monthly fee at an
annual rate of .50% of the average weekly net asset
value of the Fund. See "Management of the Fund."
Administrator Hyperion Capital Management, Inc. will act as the
Fund's administrator (the "Administrator"). The Fund
will pay the Administrator a monthly fee at an annual
rate of .15% of the average weekly net assets of the
Fund. Investors Capital Services, Inc. will act as
sub-administrator of the Fund and will be paid by the
Administrator. See "Management of the Fund."
Distributions The Fund intends to distribute quarterly all or
substantially all of its net investment income to
holders of the Fund's Common Stock. It is expected
that the initial dividend on shares of the Fund's
Common Stock will be declared to holders of the Fund's
Common Stock on the 1st day of the fiscal quarter
which follows the first fiscal quarter in which an
investor (other than the Adviser or an affiliate of
the Adviser) becomes a holder of the Fund's Common
Stock. The initial dividend will then be paid on the
15th day of such quarter. Thereafter, holders of the
Fund's Common Stock on the 1st day of a fiscal quarter
of the Fund will become entitled to distributions made
on the 15th day of each fiscal quarter. See "Taxes."
Estimated Expenses The Fund's annual operating expenses, including
advisory and administrative fees and other expenses
(excluding interest expenses), are estimated to be
approximately .75% in its first full year of
operations. Annual operating expenses (excluding any
extraordinary items) in excess of .75% of the Fund's
average daily net assets for any year will be paid by
the Adviser. Estimated offering expenses of $50,000
will be charged to capital upon completion of the
offering of the common stock. See "Summary of the
Fund's Expenses" and "Management of the Fund."
Repurchase of Shares Beginning eighteen months after this offering, the
Board of Directors of the Fund may, in its sole
discretion and from time to time, consider share
repurchases pursuant to rules of the Securities and
Exchange Commission which permit discretionary tender
offers and repurchase offers. There can be no
assurance that the Fund will in fact redeem any of its
Shares. See "Discretionary Tender Offers and
Repurchase Offers".
Listing The Shares will not be listed on a stock exchange. It
is not anticipated that a market for the Shares will
develop.
Fund
Termination The Fund expects to distribute in cash all of its net
assets on or prior to December 31, 2001, and
immediately thereafter to terminate, provided that
the duration of the Fund may be extended for
successive one-year periods provided that each
continuance is specifically approved in advance by the
holders of
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274828.19
<PAGE>
more than 75% of the outstanding shares of the Fund's
Common Stock. In the event either Clifford E. Lai or
Thomas H. Mattinson ceases his affiliation with the
Adviser and its affiliates, the Fund will
automatically terminate, unless the duration of the
Fund is otherwise extended by the approval of more
than 75% of the outstanding shares of the Fund's
Common Stock. Notwithstanding the foregoing, the Fund
may be liquidated at any time upon the unanimous
consent of the shareholders. No fee will be imposed in
connection with the Fund's termination and
liquidation.
Risk Considerations Investment in the Fund involves special
considerations, as the Fund is a closed-end
investment company which invests principally in below
investment grade CMBS. The Fund is intended to be for
investors who seek a long-term investment. Since the
formation of the Fund on September 12, 1995, the
Adviser has been the sole shareholder of the Fund. The
Fund has invested the initial contribution of the
Adviser in short-term repurchase agreements and
treasury bills. The Fund has no other history of
operations. No trading market exists or is expected to
exist for the Shares. A loss of some or all of your
investment is a risk of investing in the Fund. A
summary of the principal risks of investing in the
Fund follows.
Non-diversification. An investment in the Fund's
Common Stock cannot be considered a complete
investment program. Because the Fund's investment
portfolio will be non-diversified, the shares may be
subject to greater risk than the shares of a
closed-end investment company whose portfolio is
diversified.
Commercial Mortgage-Backed Securities. The Fund will
invest primarily in below investment grade CMBS.
Investors should consider the risks associated with
investing in CMBS and other mortgage-related
securities which may involve the risks of delinquent
payments of interest and principal, early prepayments
and potential unrecoverable principal loss from the
sale of foreclosed property. The below investment
grade quality of the CMBS also present additional
risks which are discussed below. Additionally, by
investing in Commercial Mortgage Loans, the Fund may
acquire rights of equity in real estate through its
holdings. See "Taxes" for a discussion of the federal
tax implications of such holdings. The management and
disposition of these equity interests may pose
additional risks to the principal investments of the
Fund. See "Risk Considerations."
Investing in Lower Credit Quality Securities.
Investors should recognize that below investment-grade
and unrated CMBS and other mortgage-related securities
in which the Fund will invest have speculative
characteristics. The prices of lower credit quality
securities have been found to be less sensitive to
interest rate changes than more highly rated
investments, but more sensitive to adverse economic
downturns or individual issuer developments. A
projection of an economic downturn or of a period of
rising interest rates, for example, could cause a
decline in the price of lower credit quality
securities because the advent of a recession could
lessen the ability of obligors of mortgages underlying
such investments to make principal and interest
payments. In such event, existing credit supports may
be insufficient to protect loss of principal.
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274828.19
<PAGE>
Illiquid Securities. The Fund may invest in securities
such as CMBS that may lack an established secondary
trading market or are otherwise considered illiquid.
Liquidity of a security refers to the ability to
easily dispose of securities and the price to be
obtained, and does not necessarily relate to the
credit risk or likelihood of receipt of cash at
maturity. Illiquid securities may trade at a discount
from comparable, more liquid investments. The CMBS and
other mortgage-related securities which the Fund
intends to acquire may be less marketable or in some
instances illiquid because of the absence of
registration under the federal securities laws,
contractual restrictions on transfer and the small
size of the issue (relative to the issues of
comparable interests). There is no limit on the
percentage of the Fund's assets that may be invested
in illiquid securities. See "Risk Considerations."
Borrowing. The Fund may borrow from banks or through
repurchase agreements in amounts up to one-third of
total assets and pledge some assets as collateral. The
Fund will pay interest on borrowed money and may incur
other transaction costs. These expenses can exceed the
income received or capital appreciation realized by
the Fund from any securities purchased with borrowed
money. Further, the Fund may invest in securities with
borrowed money which lose value, thereby increasing
the amount of loss incurred by an investor. In times
of volatile markets, a sudden drop in the value of the
assets of the Fund may cause the Fund to violate
agreed upon credit maintenance ratios. This could
result in a default under such loan agreements causing
an early call of a loan and/or the payment of
penalties to the lender; thereby causing a loss of
income and/or principal to investors in the Fund.
Other Investment Management Techniques. The Fund may
use various other investment management techniques
that also involve special considerations including
engaging in hedging transactions (when available and
cost efficient) used to affect the Fund's average
duration of securities in which it invests and
entering into repurchase agreements. For further
discussion of these practices and the associated risks
and special considerations, see "Risk Considerations."
Market Value of Assets. The market values of the
Fund's assets will generally fluctuate inversely with
changes in prevailing interest rates and directly with
the perceived credit quality of such assets. To the
extent the various hedging techniques and active
portfolio management employed by the Fund do not
offset these changes, the net asset value of the
Fund's Shares will also fluctuate in relation to these
changes. The various investment techniques employed by
the Fund and the different characteristics of
particular securities in which the Fund may invest
make it difficult to predict precisely the impact of
interest rate and credit quality changes on the net
asset value of the Shares. Market value may also be
impaired by actual principal losses resulting from
collateral foreclosures and sales.
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274828.19
<PAGE>
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SUMMARY OF THE FUND'S EXPENSES
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The expense summary below was developed to help you make your investment
decisions. You should consider this expense information along with other
important information in this Private Placement Memorandum, including the Fund's
investment objective.
Estimated Annual Fund Expenses
(as a percentage of average daily net assets)
Investment Advisory Fees..................................... .50%
Other Expenses............................................... .25%
(including Administration Fees. . . . . . . . . . .15%)
=====
Total Annual Fund Operating Expenses......................... .75%
Example:
A shareholder would pay the following expenses on a 10,000 investment
in the Fund, assuming a 5% annual return:
1 Year 3 Years 5 Years 10 Years
$102 $318 $552 $1,225
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The purpose of the expense table provided above is to assist
investors in understanding the various costs and expenses that an
investor in the Fund would bear directly or indirectly. The expenses
reflected above are estimates of the expenses the Fund will incur.
For a further discussion of these fees, see "Management of the Fund."
If the Fund incurs actual total operating expenses (excluding
extraordinary items) in excess of .75% of the Fund's average daily
net assets in any year, such excess will be paid by the Adviser and
will not be charged to the Fund or its shareholders.
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274828.19
<PAGE>
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USE OF PROCEEDS
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The net proceeds of this offering, after deduction of the current offering
expenses (estimated to be $50,000), will be invested in accordance with the
policies set forth under "Investment Policies." A portion of the offering
expenses of the Fund has been advanced by the Adviser and may be repaid by the
Fund upon closing of this offering.
The Fund estimates that the net proceeds of this offering will be fully
invested in accordance with the Fund's investment objective and policies within
one year of the initial offering. Pending such investment, the proceeds may be
invested in U.S. Government securities or short-term investment grade debt
obligations or money market instruments. See "Investment Policies."
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THE FUND AND ITS OBJECTIVE, POLICIES AND RISKS
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The Fund
The Fund is a closed-end, non-diversified management investment company
that was incorporated on September 12, 1995 under the laws of the State of
Maryland. On September 12, 1995, the Adviser contributed $100,000, which since
that time has been invested in short-term repurchase agreements. In addition, on
or before January __, 2000, Lend Lease Real Estate Investments, Inc. ("Lend
Lease Real Estate") will purchase at least $720,000 of the Fund's Shares, and
Hyperion Capital Management, Inc. will purchase at least $100,000 of the Fund's
Shares. The Fund has had no other investment activity since its inception. The
Fund intends to allocate the net proceeds of the offering in accordance with the
investment objective and policies as described below. The investment adviser
believes that the Fund will fully invest the proceeds of the offering within one
year depending on market conditions. The Fund expects to distribute in cash all
of its net assets on or before December 31, 2001, and immediately thereafter to
terminate, provided that the duration of the Fund may be extended for successive
one-year periods provided that each continuance is specifically approved in
advance by the holders of more than 75% of the outstanding shares of the Fund's
Common Stock. In the event either Clifford E. Lai or Thomas H. Mattinson ceases
his affiliation with the Adviser and its affiliates, the Fund will automatically
terminate, unless otherwise extended by the approval of more than 75% of the
outstanding shares of the Fund's Common Stock. Notwithstanding the foregoing,
the Fund may be liquidated at any time upon the unanimous consent of the
shareholders. Prior to its termination and liquidation, the Fund intends, at all
times, to have greater than 100 beneficial owners of its securities.
Investment Objective
The Fund's investment objective is to provide high total return by
investing in securities backed by real estate debt. The Fund will seek to
achieve its objective by investing, under normal circumstances, at least 65% of
its assets in below investment grade CMBS. The Fund may also invest in other
mortgage-related securities or assets including Commercial Mortgage Loans,
Mezzanine Capital, and debt securities of real estate investment trusts, as well
as securities issued or guaranteed by the U.S. Treasury. The majority of assets
in which the Fund will invest are expected to be rated BB or below. Investments
in lower rated securities or unrated securities of equivalent credit quality are
subject to special risks, including a greater risk of loss of principal and
non-payment of interest. An investor should carefully consider these factors
before purchasing shares of Common Stock of the
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274828.19
<PAGE>
Fund. The investment objective of the Fund is fundamental and may not be changed
without approval by the holders of more than 75% of the shares of the Fund's
Common Stock. No assurance can be given that the Fund's objective will be
achieved. Like all investors in interest bearing securities, the Fund is exposed
to risk that the prices of individual securities held by the portfolio may
fluctuate, in some cases significantly, in response to changes in credit
conditions and prevailing levels of interest rates. See "Risk Considerations."
Investment Policies
In determining which commercial mortgage-backed securities the Fund will
purchase, the Adviser will consider, among other factors, the following:
creditworthiness of the borrower, characteristics of the underlying mortgage
loan, including the loan-to-value ratio ("LTV") and debt service coverage ratio,
loan seasoning, and refinancing risk; characteristics of the underlying
property, including diversity of the loan pool, occupancy and leasing, and
competitiveness in the pertinent market; economic, environmental and local
considerations; deal structure, including historical performance of the
originator, subordination percentages; and structural participants such as
administrators and servicers.
In addition to examining the relative value of the investments as
indicated above, the Adviser's disciplined approach to investments for the
Fund's portfolio will include considerable interaction with rating agencies,
servicers and special servicers, conducting its own real estate due diligence,
reviewing third party due diligence of the underlying mortgage securities,
extensive review of due diligence by underwriters and rating agencies,
confirmation of debt service coverage ratios and stress testing of security cash
flows. The Adviser also will select investments which will vary the portfolio by
underlying property types and geographic regions.
The Fund may invest its assets without limitation in (i) cash, (ii)
short-term, investment-grade debt obligations or money market instruments or
(iii) securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities for the following cash management reasons: (1) liquidation of
Fund assets and pending reinvestment of the proceeds in accordance with the
Fund's investment objective and policies; (2) to pay distributions to
shareholders and operating expenses; and (3) to meet its obligations under any
tender offer or share repurchases. In addition, the Fund may take a temporary
defensive posture and invest without limitation in the securities listed above
at such times as the Adviser, in its sole discretion, believes that it is in the
best interest of the Fund's shareholders to assume such a defensive posture. To
the extent that the Fund invests in such instruments, it may not achieve its
investment objective.
The Fund may also employ various hedging techniques, including interest
rate transactions, that will affect the Fund's average duration. (See "Risk
Considerations -- Hedging Transactions.") In addition, the Fund may use various
techniques and investments to increase or decrease its exposure to changing
security prices, interest rates or other factors that affect security values.
These techniques and investments may involve derivative transactions such as
buying and selling options and futures contracts, selling securities short and
investments in mortgage-backed securities. The Fund may use these practices to
adjust the risk and return characteristics of the Fund's portfolio. However,
these techniques or investments may result in a loss, regardless of whether the
intent was to reduce risk or increase return, with unexpected changes in market
conditions or if the counterparty to the transaction does not perform as
promised. In addition, these techniques or investments may increase the
volatility of the Fund and may involve a small investment of cash relative to
the magnitude of the risk assumed.
The following is a discussion of the various investments eligible to be
purchased by the Fund and the investment techniques anticipated to be employed
by the Fund.
(1) Commercial Mortgage-Backed Securities -- CMBS are generally
multi-class debt or pass-through securities backed by a mortgage loan or pool of
mortgage loans secured by commercial property, such as industrial and warehouse
properties, office buildings, retail centers and shopping malls, multi-family
properties and cooperative apartments, hotels and motels, nursing homes,
hospitals, senior living centers, manufactured living communities and mobile
home parks. Assets underlying CMBS may relate to many properties, only a few
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274828.19
<PAGE>
properties, or to a single property. Each commercial mortgage loan that
underlies CMBS has certain distinct characteristics.
Commercial mortgage loans are sometimes not amortizing and often not fully
amortizing. At their maturity date, repayment of the remaining principal balance
or "balloon" is due and is repaid through the attainment of an additional loan,
the sale of the property or the contribution of additional capital. Unlike most
single family residential mortgages, commercial real property loans often
contain provisions that substantially reduce the likelihood that they will be
prepaid. The provisions generally impose significant prepayment penalties on
loans and, in some cases, there may be prohibitions on principal prepayments for
several years following origination. This difference in prepayment exposure is
significant due to the extraordinarily high levels of refinancing of traditional
residential mortgages experienced over the past years when mortgage rates
reached a 25 year low. Changing real estate markets may adversely affect both
the value of the underlying collateral and the borrower's ability to meet
contractual obligations, either of which may lead to delinquencies, defaults,
modifications or foreclosure that in turn may lead to the realization of credit
losses in CMBS. See "Risk Considerations."
CMBS have been issued in public and private transactions by a variety of
public and private issuers. Non-governmental entities that have issued or
sponsored CMBS offerings include owners of commercial properties, originators
of, and investors in, mortgage loans, savings and loan associations, mortgage
banks, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. The Fund may from time to time purchase
CMBS directly from issuers in negotiated or non-negotiated transactions or from
a holder of such CMBS in the secondary market.
Commercial mortgage securitizations generally are senior/subordinated
structures. The senior class investors are deemed to be protected against
potential losses on the underlying mortgage loans by the subordinated class
investors who take the first loss if there are defaults on the underlying
commercial mortgage loans. Other protections, which may benefit all of the
classes including the subordinated classes, may include issuer guarantees,
additional subordinated securities, cross-collateralization,
over-collateralization and the equity investor in the underlying properties.
By adjusting the priority of interest and principal payments on each class
of a given CMBS, issuers are able to create senior investment grade securities
and lower rated or unrated subordinated securities tailored to meet the needs of
sophisticated institutional investors. In general, subordinated classes of CMBS
are entitled to receive repayment of principal only after all required principal
payments have been made to more senior classes and have subordinate rights as to
receipt of interest distributions. Such subordinated classes are subject to a
substantially greater risk of nonpayment than are senior classes of CMBS. Even
within a class of subordinated securities, most CMBS are structured with a
hierarchy of levels (or "loss positions"). Loss positions determine the order in
which nonrecoverable losses of principal are applied to the securities within a
given structure. For instance, a first loss subordinated security will absorb
any principal losses before any higher loss subordinate position. This type of
structure allows a number of classes of securities to be created with varying
degrees of credit exposure, prepayment exposure and potential total return. The
Fund will invest in subordinated class securities and may invest in first loss
subordinated securities which may be unrated securities.
The Fund may also create or acquire interest only classes of CMBS ("IOs"),
which are classes of CMBS that are entitled to no (or only nominal) payments of
principal, but only to payments of interest. The yield to maturity of IOs is
very sensitive to changes in the weighted average life of such securities, which
in turn is dictated by the rate of prepayments on the underlying mortgage
collateral. Yield on IOs may be adversely affected by interest rate changes. In
periods of declining interest rates, rates of prepayments on mortgage loans
generally increase, and if the rate of prepayments is faster than anticipated,
then the yield on IOs will be affected adversely. The Fund also may invest in
Sub IOs, a class for which interest generally is withheld and used to make
principal payments on more senior classes. Sub IOs provide credit support to the
senior classes, and thus bear substantial credit risk. Moreover, because all IO
classes only receive interest payments, their yields are extremely sensitive
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not only to default losses but also to changes in the weighted average life of
the relevant classes, which in turn will be dictated by the rate of prepayments
on the underlying Mortgage Collateral.
The following table sets forth an example of the prioritization of the
payments to each class as well as the order of absorption of credit losses, if
any, on the underlying mortgage loans. The table provides a example of the
current CMBS structures, however, the actual ratings, cash flows and loss
absorption priorities of the CMBS in which the Fund will invest may differ.
General Examples Of CMBS Structures
<TABLE>
<CAPTION>
Excess
Principal Loss
Typical Cash Flow Absorption
Class Rating Priority Priority
----- ------ -------- --------
<S> <C> <C> <C> <C>
Senior A-1 "AAA" 1st 7
Senior A-2 "AA" 2nd 6
Subordinated B-1 "A","BBB" 3rd, 4th 5
Subordinated B-2 "BB" 5th 4
Subordinated B-3 "B" 6th 3
Subordinated B-4 Unrated 7th 2
Equity Holder N/A N/A 1
</TABLE>
The rating assigned to a given issue and class of CMBS is a product
of many factors, including, but not limited to, the structure of the security,
the level of subordination, the quality and adequacy of the collateral,
projected losses from the collateral and the past performance of the originators
and servicing companies. The rating of any CMBS is determined to a substantial
degree by the debt service coverage ratio (i.e., the ratio of current net
operating income from the commercial properties, in the aggregate, to the
current debt service obligations on the properties) and the LTV ratio of the
pooled properties. The amount of the securities issued in any one rating
category is determined by the rating agencies after a rigorous credit rating
process which includes analysis of the issuer, servicer and property manager, as
well as verification of the LTV and debt service coverage ratios. LTV ratios may
be particularly important in the case of commercial mortgages because most
commercial mortgage loans generally provide that the lender's sole remedy in the
event of a default is against the mortgaged property, and the lender is not
permitted to pursue remedies with respect to other assets of the borrower.
The Fund may invest in Fannie Mae MBS/DUS which are Delegated
Underwritings and Services (DUS)/multi-family mortgage-backed securities. Fannie
Mae delegates to selected lenders the responsibility for underwriting, closing
and delivering multifamily mortgages without Fannie Mae's prior review. Fannie
Mae Multifamily has 26 active lenders that participate in DUS. Each lender must
have at least $7.5 million in acceptable net worth, including at least $500,000
in liquid assets. The DUS lender is at risk for a portion of any loss resulting
from default. Generally, mortgages eligible for MBS/DUS include fixed-rate
mortgages with 5-, 7-, 10-, 15 and 18- year balloon maturities. DUS loans
generally are non-recourse to the borrower and are generally assumable. Eligible
properties must be income-producing multifamily rental or cooperatives with a
minimum of five units. Required are title insurance, property insurance, rent
loss insurance and if applicable, steam boiler, builder's risk and flood
insurance. Occupancy must be the greater of 90% or break even for 3 consecutive
months prior to receiving a DUS commitment.
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<PAGE>
(2) Commercial Mortgage Loans - A Commercial Mortgage Loan is a legal
instrument for pledging a described property interest for the repayment of a
loan under certain terms and conditions, and constitutes a lien on the interest
pledged. Commercial Mortgage Loans supply most of the capital employed in real
estate investments. A borrower gives a lender a lien on real estate as assurance
that the loan will be repaid. If the borrower fails to make payment, the lender
can foreclose the lien and acquire the real estate, thereby offsetting the loss.
Under normal market conditions, the Fund may invest in Commercial Mortgage
Loans, which involve loans to a single obligor on a single asset. Commercial
Mortgage Loans, also known as whole loans, are nonrecourse to the borrower and
therefore repayment of a Commercial Mortgage Loan will be dependent solely on
the cash flow derived from, and the market or liquidation value of, the
underlying property. Other assets of the borrower, if any, would generally not
be available to the lender for payment of the Commercial Mortgage Loan.
Commercial real estate lending can be affected significantly by the condition of
the property, supply and demand in the market for the type of property securing
a Commercial Mortgage Loan and adverse economic conditions. Market values may
vary as a result of economic events or governmental regulations outside the
control of the borrower or lender, which events may impact the future cash flow
of the property. For example, under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances in, on, under or in the vicinity of such real
property. Such laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of such hazardous or toxic
substances. The borrower's income and ability to make payments on its Commercial
Loan could be affected adversely by the existence of an environmental liability
with respect to its properties. A borrower subsequently defaulting on its
Commercial Loan would then cause a loss to the Fund and its investors.
A borrower may pledge real estate to more than one lender, thereby
creating several liens; in such cases, the order of the liens is important. The
first loan contract executed and recorded is the first Mortgage, which has
priority over all subsequent transactions. Second and third Mortgages are
sometimes referred to as junior liens because they involve more lending risk
than first Mortgages, as they have a lower priority of repayment in the event of
default, therefore higher rates of interest are charged for secondary financing.
(3) Mezzanine Capital - Mezzanine Capital investments, which may take the
form of a subordinate mortgage or a preferred equity position, represent the
middle "tier" of a three (or more) tier commercial real estate capital
structure. Mezzanine Capital investments are subordinate to first mortgage loans
with respect to principal and interest payments and senior to the equity
ownership position with respect to principal and interest payments and/or
preferred cash flows. Capital losses experienced at the property level are
absorbed in reverse order of seniority, first by the equity ownership position,
second by the Mezzanine Capital position, and finally by the first mortgage
position. Typically, the equity ownership position will comprise 5-25% of the
capital structure, the Mezzanine Capital position 5-50%, and the first mortgage
position 40-75%. Mezzanine Capital positions often receive attractive current
income returns and high total return. See "Risk Considerations."
(4) Debt Securities Issued by Real Estate Investment Trusts - The Fund
may invest in debt securities issued by real estate investment trusts ("REIT
Debt Securities"). REITs are pooled investment vehicles which invest primarily
in income producing real estate or real estate related loans or interests and
have elected and qualified for REIT status under the Internal Revenue Code of
1986, as amended (the "Code"). Generally, REITs can be classified as equity
REITs, mortgage REITs, or hybrid REITs. Equity REITs invest the majority of
their assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority of
their assets in real estate mortgages and derive income from the collection of
interest payments. Hybrid REITs combine the characteristics of both equity REITs
and mortgage REITs.
REIT Debt Securities, for the most part, are general and unsecured
obligations. These securities typically have corporate bond features such as
semi-annual interest coupons, no amortization and strong
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<PAGE>
prepayment protection. Further, REITs are subject to heavy cash flow dependency,
default by borrowers, self-liquidation, and the possibilities of failing to
qualify for the exemption from tax on distributed income under the Code and
failing to maintain their exemptions from the 1940 Act. Additionally, real
estate related unsecured debt generally contains covenants restricting the level
of secured and total debt and requires a minimum debt service coverage ratio and
net worth level. See "Risk Considerations."
(5) U.S. Treasury Securities - These include issues of the U.S. Treasury,
such as bills, certificates of indebtedness, notes and bonds. U.S. Treasury
Securities are backed by the full faith and credit of the U.S. Government.
(6) The Fund may also purchase Repurchase Agreements and engage in hedging
transactions which are discussed more fully in "Risk Considerations".
The investment policies of the Fund, like the investment objective of the
Fund, are fundamental and cannot by changed without the approval of the holders
of more than 75% of the shares of the Fund's Common Stock.
Investment Restrictions
The Fund has adopted the following fundamental investment restrictions
which may not be changed without the approval of the holders of more than 75% of
the shares of the Fund's Common Stock. The Fund is subject to further investment
restrictions that are set forth in the Statement of Additional Information. The
Fund may not:
1. Borrow money (commonly referred to as "leverage") in an
aggregate amount in excess of 33 1/3% of the Fund's total
assets (after giving effect to any such leveraging).
2. Pledge, hypothecate, mortgage or otherwise encumber its assets
other than to secure such issuances or borrowings as set forth
in restriction No. 1 above or in connection with, to the extent
permitted under the 1940 Act, good faith hedging transactions
(including interest rate swaps), reverse repurchase agreements,
when issued and forward commitment transactions.
3. Invest in securities of other investment companies, except that
the Fund may purchase unit investment trust securities where
such unit investment trusts meet the investment objective of
the Fund and then only up to 5% of the Fund's net assets,
except as they may be acquired as part of a merger,
consolidation or acquisition of assets but in no event to an
extent not permitted by Section 12(d) of the Investment Company
Act of 1940 (the "1940 Act").
4. Invest in CMBS where the underlying assets are non-dollar
denominated Commercial Mortgage Loans.
5. Invest in any security that would cause any investor in the
Fund to be required to make a filing under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
Risk Considerations
Lower Rated and Unrated Securities (commonly referred to as "Junk")--
Generally, lower rated or unrated securities of equivalent credit quality offer
a higher return potential than higher rated securities but involve greater
volatility of price and greater risk of loss of income and principal, including
the possibility of a default or bankruptcy of the issuers of such securities.
Lower rated securities and comparable unrated securities
-14-
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<PAGE>
will likely have larger uncertainties or major risk exposure to adverse
conditions and are predominantly speculative. The occurrence of adverse
conditions and uncertainties would likely reduce the value of securities held by
the Fund, with a commensurate effect on the value of the Fund's shares. While
the market values of lower rated securities and unrated securities of equivalent
credit quality tend to react less to fluctuations in interest rate levels than
do those of higher-rated securities, the market value of certain of these lower
rated securities also tend to be more sensitive to changes in economic
conditions including, unemployment rates, inflation rates and negative investor
perception than higher-rated securities. In addition, lower rated securities and
unrated securities of equivalent credit quality generally present a higher
degree of credit risk. The Fund may incur additional expenses to the extent that
it is required to seek recovery upon a default in the payment of principal or
interest on its portfolio holdings.
The weighted average credit quality of the Fund once it is fully invested
is expected to be B to BB. Securities which are rated Ba by Moody's, BB by S&P,
BB by Duff & Phelps Credit Rating Corporation ("D&P") or BB by Fitch Investors
Service, Inc. ("Fitch") (collectively referred to as the "Rating Agencies") have
speculative characteristics with respect to capacity to pay interest and repay
principal. Securities which are rated B generally lack characteristics of a
desirable investment, and assurance of interest and principal payments over any
long period of time may be small. Securities which are rated Caa or CCC or below
are of poor standing and highly speculative. Those issues may be in default or
present elements of danger with respect to principal or interest. Securities
rated C by Moody's, D by S&P, or the equivalent by D&P or Fitch are in the
lowest rating class. Such ratings indicate that payments are in default, or that
a bankruptcy petition has been filed with respect to the issuer or that the
issuer is regarded as having extremely poor prospects. A general description of
the ratings of Moody's, S&P, D&P and Fitch are set forth in Appendix A. It is
unlikely that future payments of principal or interest will be made to the Fund
with respect to these highly speculative securities other than as a result of
the sale of the securities or the foreclosure or other forms of liquidation of
the collateral underlying the securities.
In general, the ratings of the Rating Agencies represent the opinions of
these agencies as to the quality of securities that they rate. Such ratings,
however, are relative and subjective, and are not absolute standards of quality
and do not evaluate the market value risk of the securities. It is possible that
an agency might not change its rating of a particular issue to reflect
subsequent events. These ratings will be used by the Fund as data in the
selection of portfolio securities, but the Fund also will rely upon the
independent advice of the Adviser to evaluate potential investments.
In order to calculate the average credit quality of the Fund, the Fund
will assign sequential numbers to each of the 10 rating categories from BB (Ba)
to Unrated, multiply the value of each instrument by the rating equivalent
number assigned to its lowest rating, sum all of such products, divide the
aggregate by the net asset value of the Portfolio and convert the number back to
its equivalent rating symbol. All securities rated less than B-, except for
securities rated D, shall have the same rating number. Securities rated D will
have a rating number of 0.
Tax Risks - A discussion of tax risks attributable to the Fund's
anticipated acquisition of lower rated or unrated securities is included in
"Taxes."
Commercial Mortgage-Backed Securities - Investments in CMBS involve the
credit risk of delinquency and default. Delinquency refers to interruptions in
the payment of interest and principal. Default refers to the potential for
unrecoverable principal loss from the sale of foreclosed property. These risks
include the risks inherent in the commercial mortgage loans which support such
CMBS and the risks associated with direct ownership of real estate. This may be
especially true in the case of CMBS secured by, or evidencing an interest in, a
relatively small or less diverse pool of commercial mortgage loans. The factors
contributing to these risks include the effects of general and local economic
conditions on real estate values, the conditions of specific industry segments,
the ability of tenants to make lease payments and the ability of a property to
attract and retain tenants, which in turn may be affected by local conditions
such as oversupply of space or a reduction of available
-15-
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<PAGE>
space, the ability of the owner to provide adequate maintenance and insurance,
changes in management of the underlying commercial property, energy costs,
government regulations with respect to environmental, zoning, rent control,
bankruptcy and other matters, real estate and other taxes, and prepayments of
the underlying commercial mortgage loans (although such prepayments generally
occur less frequently than prepayments on residential mortgage loans).
While the credit quality of the securities in which the Fund invests will
reflect the perceived appropriateness of future cash flows to meet operating
expenses, the underlying commercial properties may not be able to continue to
generate income to meet their operating expenses (mainly debt services, lease
payments, capital expenditures and tenant improvements) as a result of any of
the factors mentioned above. Consequently, the obligors under commercial
mortgages may be unable to make payments of principal and interest in a timely
fashion, increasing the risk of default on a related CMBS. In addition, the
repayment of the commercial mortgage loans underlying CMBS will typically depend
upon the future availability of financing and the stability of real estate
property values.
Most commercial mortgage loans are non-recourse obligations of the
borrower, meaning that the sole remedy of the lender in the event of a default
is to foreclose upon the collateral. As a result, in the event of default by a
borrower, recourse may be had only against the specific property pledged to
secure the loan and not against the borrower's other assets. If borrowers are
not able or willing to refinance or dispose of the property to pay the principal
balance due at maturity, payments on the subordinated classes of the related
CMBS are likely to be adversely affected. The ultimate extent of the loss, if
any, to the subordinated classes may only be determined after a foreclosure of
the mortgage encumbering the property and if the mortgagee takes title to the
property upon liquidation of the property. Factors such as the title to the
property, its physical conditions and financial performance, as well as
governmental disclosure requirements with respect to the condition of the
property, may make a third party unwilling to purchase the property at a
foreclosure sale or for a price sufficient to satisfy the obligations with
respect to the related CMBS. The condition of a property may deteriorate during
foreclosure proceedings. Certain obligors on underlying mortgages may become
subject to bankruptcy proceedings, in which case the amount and timing of
amounts due under the related CMBS may be materially adversely affected.
In general, any losses on a given property, the lien on which is included
in a CMBS, will be absorbed first by the equity holder of the property and then
by the "first loss" subordinated security holder to the extent of its principal
balance. Because the Fund intends to invest in both senior classes and
subordinated classes of CMBS, in the event of default the equity support, any
debt classes junior to those in which the Fund invests will bear losses prior to
the Fund. However, there can be no assurance that the Fund will be able to
recover all of its investments in the securities it purchases. In addition, if
the underlying mortgage portfolio has been overvalued by the originator, or if
the values subsequently decline, the Fund may bear significant losses.
The Fund also may create or acquire interest only classes of CMBS ("IOs"),
which are classes of CMBS that are entitled to no (or only nominal) payments of
principal, but only to payments of interest. The yield to maturity of IOs is
very sensitive to changes in the weighted average life of such securities, which
in turn is dictated by the rate of prepayments on the underlying mortgage
collateral. Yield on IOs may be adversely affected by interest rate changes. In
periods of declining interest rates, rates of prepayments on mortgage loans
generally increase. If the rate of prepayments occurs faster than anticipated,
then the yield on IOs will be affected adversely. The Fund also may create or
acquire Sub IOs, a class for which interest generally is withheld and used to
make principal payments on more senior classes. Sub IOs provide credit support
to the senior classes, and thus bear substantial credit risk. Moreover, because
all IO classes only receive interest payments, their yields are extremely
sensitive not only to default losses but also to changes in the weighted average
life of the relevant classes, which in turn will be dictated by the rate of
prepayments on the underlying Mortgage Collateral.
Commercial Mortgage Loans - Commercial Mortgage Loans generally lack
standardized terms, which may complicate their structure. Commercial properties
themselves tend to be unique and are more difficult to value than single family
residential properties. Commercial Mortgage Loans also tend to have shorter
maturities
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<PAGE>
than residential mortgage loans and may not be fully amortizing, meaning that
they may have a significant principal balance, or "balloon," due on maturity.
The timely payment of interest and principal on a Commercial Mortgage Loan
is secured by an income producing property and, therefore, is dependent upon
performance and payments by the lessees under the related leases and the
successful operation of the underlying property, rather than its liquidation
value. If the net operating income from the underlying property is reduced (for
example, if rental or occupancy rates decline or real estate tax rates or other
operating expenses increase), the borrower's ability to repay the Commercial
Mortgage Loan may be impaired. Furthermore, the liquidation value of the
property may be adversely affected by risks generally incident to interests in
real property, including changes in general or local economic conditions and/or
specific industry segments; declines in real estate values; declines in rental
or occupancy rates; increases in interest rates, real estate tax rates and other
operating expenses including energy costs; changes in governmental rules,
regulations and fiscal policies, including environmental legislation; acts of
God; and other factors which are beyond the borrower's, the lender's or the
property manager's control. Additionally, the borrower may be obligated to cause
standard hazard insurance to be maintained with respect to an underlying
property. Insurance with respect to extraordinary hazards such as earthquakes is
not always required, and insurance may not be available (or is available only at
prohibitively expensive rates) with respect to many other risks, including those
listed above. In addition, there is no assurance that any loss incurred will not
exceed the limits of policies obtained.
In addition, the borrower's ability to make payments in respect of a
Commercial Mortgage Loan largely depends on the ability of tenants to perform
under their rental obligations under existing leases and the ability of the
borrower to continue to lease a substantial portion of the property upon terms
which do not adversely affect the property's cash flow. As the leases expire or
lessees default, the demand for, and supply of, rental space in general, from
time to time, may affect the property's occupancy rate and the rental rates
obtained and concessions, if any, granted on new leases or re-leases of space,
which may cause fluctuations in the cash flow from the operation of the
property. Such fluctuations, may affect the amount and timing of payments on the
Commercial Mortgage Loan.
Furthermore, Commercial Mortgage Loans with balloon payments involve a
greater degree of risk of payment because the ability of a borrower to make a
balloon payment will depend upon its ability to either refinance the loan or to
sell the related property. The ability and desire of the borrower to accomplish
either of these goals will be affected by a number of factors, including the
level of available mortgage rates at the time of sale or refinancing, the
borrower's equity in the property, the physical and financial condition and
operating history of the property, tax laws, prevailing general economic and
market conditions and the availability of credit for commercial real estate
projects, generally. In addition, the value of commercial properties depends, in
part, on the fitness of such properties for a particular purpose. Thus, no
assurance can be given that other parties will find such property sufficient for
the purpose for which it is currently being used.
Mezzanine Capital - Investments in Mezzanine Capital involve similar
risks associated with investments in real estate and subordinated mortgage
investments. Such risks which are commonly associated with the general and local
economic conditions affecting the real estate market and the credit risks of
delinquency and default are discussed in "Risk Considerations-Commercial
Mortgage-Backed Securities" and "Risk Considerations-Commercial Mortgage
Loans" herein.
Restricted and Illiquid Securities - Liquidity relates to the ability of
the Fund to readily dispose of securities and the price to be paid therefor, but
does not relate to credit risk or the likelihood of receipt of cash at maturity.
Illiquid securities are subject to legal or contractual restrictions on
disposition or lack an established secondary trading market. The sale of
restricted and illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. Restricted securities may sell at
a price lower than similar securities that are not subject to restrictions on
resale. If it qualifies, the Fund may
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<PAGE>
purchase certain restricted securities eligible for sale to qualified
institutional buyers as contemplated by Rule 144A under the 1933 Act or
restricted securities eligible for sale to institutional accredited investors
under Regulation D under the 1933 Act.
REIT Debt Securities - Investing in REIT Debt Securities involves certain
unique risks in addition to those risks associated with investing in the real
estate industry in general which include, among other things, possible declines
in the value of real estate; risks related to general and local economic
conditions; possible lack of availability of mortgage funds; over-building;
extended vacancies of properties; increases in competition, property taxes and
operating expenses; changes in zoning laws; costs resulting from the clean-up
of, and liability to, third parties for damages resulting from, environmental
problems; casualty or condemnation losses; uninsured damages from flood,
earthquakes or other natural disasters; limitations on and variations in rents;
dependency on property management skill; the appeal of properties to tenants;
and changes in interest rates. Equity REITs may be affected by changes in the
value of the underlying property owned by the REITs while mortgage REITs may be
affected by the quality of any credit extended. REITs are dependent upon
management skills, are not diversified, and are subject to the risks of
financing projects. The Fund may invest in the debt securities of new or
unseasoned REIT issuers and it, therefore, may be difficult or impossible for
the Adviser to ascertain the value of each of such REITs' underlying assets,
management capabilities and growth prospects. In addition, REITs are subject to
heavy cash flow dependency, default by borrowers, self-liquidation, and the
possibilities of failing to qualify for the exemption from tax on distributed
income under the Code and failing to maintain their exemptions from the 1940
Act. REITs whose underlying assets include long-term health care properties,
such as nursing, retirement and assisted-living homes, may be affected by
federal regulations concerning the health care industry.
REITs (especially mortgage REITs) and REIT Debt Securities are subject to
interest rate risks. When interest rates decline, the value of a REIT investment
in fixed rate obligations usually rises. Conversely, when interest rates rise,
the value of a REIT investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT investment in such loans may gradually
align themselves to reflect changes in market interest rates, causing the value
of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
Repurchase Agreements - The Fund may invest temporarily, without
limitation, in repurchase agreements, which are agreements pursuant to which
securities are acquired by the Fund from a third party with the commitment that
they will be repurchased by the seller at a fixed price on an agreed date. These
agreements may be made with respect to any of the portfolio securities in which
the Fund is authorized to invest. Repurchase agreements may be characterized as
loans by the Fund to the other party to the agreement that are secured by the
underlying securities. Repurchase agreements facilitate portfolio management and
allow the Fund to earn additional revenue. The Fund may enter into repurchase
agreements with (i) member banks of the Federal Reserve System having total
assets in excess of $500 million and (ii) securities dealers, provided that such
banks or dealers meet the creditworthiness standards established by the Advisor
("Qualified Institutions"). The Adviser will monitor the continued
creditworthiness of Qualified Institutions. The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or date of maturity of the purchased security. The collateral
will be marked to market daily. Such agreements permit the Fund to keep all of
its assets earning interest while retaining overnight flexibility in pursuit of
investments of a longer-term nature.
The use of repurchase agreements involves certain risks. For example, if
the seller of securities under a repurchase agreement defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Fund will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Fund's ability to dispose of the underlying securities may be restricted. Also,
it is possible that the Fund may not be able to substantiate its interest in the
underlying securities. To minimize this risk, the securities underlying the
repurchase agreement will be held by a custodian at all times in an amount at
least equal to the
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<PAGE>
repurchase price, including accrued interest. If the seller fails to repurchase
the securities, the Fund may suffer a loss to the extent proceeds from the sale
of the underlying securities are less than the repurchase price.
Lending of Securities - The Fund may lend its portfolio securities to
Qualified Institutions. By lending its portfolio securities, the Fund attempts
to increase its income through the receipt of interest on the loan. Any gain or
loss in the market price of the securities loaned that may occur during the term
of the loan will be for the account of the Fund.
The Fund will not lend portfolio securities if, as a result, the aggregate
of such loans exceeds 331/3% of the value of the Fund's total assets (including
such loans). All relevant facts and circumstances, including the
creditworthiness of the Qualified Institution, will be monitored by the Adviser,
and will be considered in making decisions with respect to lending of
securities, subject to review by the Fund's Board of Directors. The Fund may pay
reasonable negotiated fees in connection with loaned securities, so long as such
fees are set forth in a written contract and their reasonableness is determined
by the Fund's Board of Directors.
Borrowing - The Fund may borrow from banks or through repurchase
agreements in amounts up to one-third of total assets and pledge some assets as
collateral. The Fund will pay interest on borrowed money and may incur other
transaction costs. These expenses can exceed the income received or capital
appreciation realized by the Fund from any securities purchased with borrowed
money. Further, the Fund may invest in securities with borrowed money which lose
value, thereby increasing the amount of loss incurred by an investor. In times
of volatile markets, a sudden drop in the value of the assets of the Fund may
cause the Fund to violate agreed upon credit maintenance ratios. This could
result in a default under such loan agreements causing an early call of a loan
and/or the payment of penalties to the lender; thereby causing a loss of income
and/or principal to investors in the Fund. The Fund will only borrow when the
Adviser believes that such borrowings will benefit the Fund after taking into
account considerations such as interest income and possible gains or losses upon
liquidation.
Hedging Transactions - The Fund may, but will not be obligated to, enter
into various hedging transactions, such as interest rate swaps and the purchase
or sale of interest rate collars, caps and floors, to preserve a return or
spread on a particular investment within the portfolio or its entire portfolio
and to manage the effective maturity or interest rate sensitivity of its
portfolio. Hedging transactions may also be used to attempt to protect against
possible declines in the market value of the Fund's assets resulting from
downward trends in the debt securities markets (generally due to a rise in
interest rates), to protect any unrealized gains in the value of the Fund's
portfolio securities, to facilitate the sale of such securities or to establish
a position in the securities markets as a temporary substitute for purchasing
particular securities. Any, all or none of these techniques may be used at any
time. There is no particular strategy that requires use of one technique rather
than another. Use of any particular hedging transaction is a function of the
overall strategy adopted by the Fund and market conditions. Further hedging
transactions may be used by the Fund in the future as they are developed or
deemed by the Board of Directors of the Fund to be appropriate and in the best
interest of investors in the Fund. The Fund may not be able to hedge some of its
investments due to the cost or lack of availability of a hedging transaction.
The Fund intends to use these transactions as a hedge against market
fluctuations and to manage the duration of the Fund's investments and not as
speculative investments. The Fund may also purchase and sell (or write) options
on securities or indices of securities and may purchase or sell futures
contracts or options on futures contracts, as described below.
The Fund may employ a variety of hedging transactions as described below
and there can be no assurance that any such transaction used will succeed. The
principal risks relating to the use of hedging transactions are: (a) possible
imperfect correlation between changes in the value of the hedging instrument and
the changes in the market value of the underlying securities; (b) possible lack
of a liquid secondary market for closing out or offsetting a hedging position;
(c) losses on hedging positions resulting from general movements in securities
prices or interest rate movements not anticipated by the Adviser, and (d) the
possibility that the Fund could be obligated to pay variation margin on a
hedging position at a time when it would be disadvantageous to do so. While the
use of hedging transactions should tend to minimize the risk of loss resulting
from a decline in the value of hedged
-19-
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<PAGE>
portfolio securities, these transactions will tend to limit any potential that
could result from an increase in the value of these securities. Such
transactions also are subject to the risk that, if the Adviser is incorrect in
its forecast of interest rates, market values or other economic factors
affecting such a transaction, the Fund would have been better off if it had not
entered into the transaction.
Calls and Puts on Securities and Related Options. The Fund may engage in
various put and call transactions. The Fund may hedge through the use of call
options ("calls") on U.S. Treasury securities and CMBS that are traded on U.S.
securities exchanges and in U.S. over-the-counter markets. The Fund may purchase
and sell calls on these securities or indices thereof. Sales of calls will be
"covered" while the call is outstanding (i.e., the seller owns the securities
subject to the call or other securities acceptable for applicable escrow
requirements). Some contracts are "cash settled" (i.e., the seller pays the
difference between the call and market price in cash when the market price is
higher). Cash-settled calls also may be covered. The Fund does not intend to
sell any cash-settled calls that are not covered. If a call sold by the Fund is
exercised, the Fund forgoes any possible profit from an increase in the market
price of the underlying security over the exercise price.
The Fund may hedge through the use of put options ("puts") that relate to
U.S. Treasury securities and CMBS (whether or not it holds such securities in
its portfolio) or on indices of securities. The Fund may purchase puts on these
securities and may also sell puts on these securities or indices if such puts
are secured by segregated liquid assets. The Fund will not sell puts if, as a
result, more than 50% of the Fund's assets would be required to be segregated
liquid assets. In selling puts, there is a risk that the Fund may be required to
buy the underlying security at a disadvantageous price.
A put option gives the purchaser of the option the right to sell and the
writer, if the purchaser exercises his right, the obligation to buy the
underlying security at the exercise price during the option period. A call
option gives the purchaser of the option the right to buy and the writer, if the
purchaser exercises his right, the obligation to sell the underlying security at
the exercise price during the option period. The Fund is authorized to purchase
and sell exchange listed options and over-the-counter options ("OTC Options").
Listed options are issued by the Options Clearing Corporation ("OCC") which
guarantees the performance of the obligations of the parties to such options.
The purchaser of an option risks losing his entire investment in a short
period of time. If an option is not sold while it has remaining value, or if
during the life of an option the underlying security does not appreciate, in the
case of a call option, or depreciate, in the case of a put option, the purchaser
of such option may lose his entire investment. On the other hand, given the same
market conditions, if the potential purchaser of a call option purchases the
underlying security directly instead of purchasing a call option or if the
potential purchaser of a put option decides not to purchase the put option but
to sell the underlying security, such potential option purchaser might have less
of a loss. An option purchaser does not have the choice of "waiting out" an
unexpected decrease or increase in the underlying securities' price beyond the
expiration date of the option. The more that an option is out-of-the-money and
the shorter its remaining term to expiration, the greater the risk that a
purchaser of the option will lose all or part of his investment. Further, except
where the value of the remaining life of an option may be realized in the
secondary market, for an option purchase to be profitable the market price of
the underlying interest must exceed or be below the exercise price by more than
the premium and transaction costs paid in connection with the purchase of the
option and its sale or exercise.
The writer of an option assumes an obligation to deliver or purchase the
underlying interest represented by the option upon the assignment to him of an
exercise notice. The writer is subject to being assigned an exercise notice at
any time after he has written the option until the option expires or until he
has closed out his position by the offsetting purchase of an identical option.
The Fund's ability to close out its position as a writer or purchaser of
an exchange-listed option is dependent upon the existence of a liquid secondary
market on option exchanges. Among the possible reasons for the absence of a
liquid secondary market on an exchange are: (i) insufficient trading interest in
certain options;
-20-
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<PAGE>
(ii) restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an exchange; (v) inadequacy of the facilities of an exchange or
OCC to handle current trading volume; or (vi) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options) in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although outstanding options
on that exchange that had been listed by the OCC as a result of trades on that
exchange would generally continue to be exercisable in accordance with their
terms. OTC Options are purchased from or sold to dealers or financial
institutions which have entered into direct agreement with the Fund. With OTC
Options, such variables as expiration date, exercise price and premium will be
agreed upon between the Fund and the transacting dealer, without the
intermediation of a third party such as the OCC. If the transacting dealer fails
to make or take delivery of the securities underlying an option it has written,
in accordance with the terms of that option as written, the Fund would lose the
premium paid for the option as well as any anticipated benefit of the
transaction. OTC Options and their underlying securities may be considered
illiquid. The Fund will engage in OTC Option transactions only with primary
United States Government securities dealers recognized by the Federal Reserve
Bank of New York.
The hours of trading for options on debt securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
Futures Contracts and Related Options. The Fund may buy or sell financial
futures contracts or purchase options on such futures as a hedge against
anticipated interest rate changes. A futures contract sale creates an obligation
by the Fund, as seller, to deliver the specified type of financial instrument
called for in the contract at a specified future time for a specified price or,
in "cash settlement" futures contracts, to pay to (or receive from) the buyer in
cash the difference between the price in the futures contract and the market
price of the instrument on the specified date, if the market price is higher (or
lower, as the case may be). Options on futures contracts are similar to options
on securities except that an option on a futures contract gives the purchaser
the right for the premium paid to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put).
The Fund's use of futures and options on futures will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission ("CFTC") with which
the Fund must comply in order not to be deemed a commodity pool operator within
the meaning and intent of the Commodity Exchange Act and the regulations
promulgated thereunder.
Typically, an investment in a futures contract requires the Fund to
deposit with the applicable exchange or other specified financial intermediary
as security for its obligations an amount of cash or other specified debt
securities which initially is 1% to 5% of the face amount of the contract and
which thereafter fluctuates on a periodic basis as the value of the contract
fluctuates. An investment in options involves payment of a premium for the
option without any further obligation on the part of the Fund.
Regulations of the CFTC applicable to the Fund currently require that all
of the Fund's futures and options on futures transactions constitute bona fide
hedging transactions or be undertaken incidental to the Fund's activities in the
securities markets. In accordance with CFTC regulations, the Fund may not
purchase or sell futures contracts or options thereon if immediately thereafter
the sum of the amounts of initial margin deposits on the Fund's existing futures
positions and premiums paid for options on futures would exceed 5% of the fair
market value of the Fund's total assets. The Adviser reserves the right to
comply with such different standard as may be established by CFTC rules and
regulations with respect to the purchase or sale of futures contracts or options
thereon.
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<PAGE>
The variable degree of correlation between price movements of futures
contracts and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the value of
the Fund's position. In addition, futures and futures option markets may not be
liquid in all circumstances. As a result, in volatile markets, the Fund may not
be able to close out a transaction without incurring losses substantially
greater than the initial deposit. Although the contemplated use of these
contracts should tend to minimize the risk of loss due to a decline in the value
of the hedge position, at the same time they tend to limit any potential gain
which might result from an increase in the value of such position. The ability
of the Fund to hedge successfully will depend on the Adviser's ability to
forecast pertinent market movements, which cannot be assured. Finally, the daily
deposit requirements in futures contracts create an ongoing greater potential
financial risk than do options purchased by the Fund, where the exposure is
limited to the cost of the initial premium. Losses due to hedging transactions
will reduce net asset value. Income earned by the Fund from its hedging
activities generally will be treated as capital gains.
Interest Rate Transactions. Interest rate swaps involve the exchange with
another party of commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed rate payments). The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate floor.
An interest rate collar combines the elements of purchasing a cap and selling a
floor. The collar protects against an interest rate rise above the maximum
amount but gives up the benefits of an interest rate decline below the minimum
amount. The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or liquid securities having an aggregate net asset
value at least equal to the accrued excess will be maintained in a segregated
account by the Fund's custodian. If there is a default by the other party to
such a transaction, the Fund may have contractual remedies pursuant to the
agreements related to the transactions.
The Fund may enter into interest rate transactions to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date, to effectively fix the rate of interest that it pays on one or
more borrowings or series of borrowings or to manage the effective maturity or
interest rate sensitivity of its portfolio. The Fund would use these
transactions as a hedge and not as a speculative investment. Interest rate
transactions are subject to risks comparable to those described above with
respect to other hedging strategies.
The Fund may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability- based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these interest rate transactions are entered into for good
faith hedging purposes, and inasmuch as segregated accounts will be established
with respect to such transactions, the Adviser and the Fund believe such
obligations do not constitute senior securities and, accordingly, will not treat
them as being subject to its borrowing restrictions. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis and an amount of cash,
U.S. Government securities or other liquid high grade debt obligations having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by a custodian that satisfies the
requirements of the 1940 Act. The Fund also will establish and maintain such
segregated accounts with respect to its total obligations under any interest
rate swaps that are not entered into on a net basis and with respect to any
interest rate caps, collars and floors that are written by the Fund.
The Fund will enter into interest rate transactions only with banks and
recognized securities dealers believed by the Adviser to present minimal credit
risks in accordance with guidelines established by the Fund's Board of
Directors. If there is a default by the other party to such a transaction, the
Fund will have to rely on its
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<PAGE>
contractual remedies (which may be limited by bankruptcy, insolvency or similar
laws) pursuant to the agreements related to the transaction.
Subordinated Securities - The Fund may invest in subordinated
certificates. Credit enhancement in the form of subordination provides for the
issuance of a senior class of certificates which are generally rated at least
AA/Aa by any of the Rating Agencies and one or more classes of subordinated
certificates which bear ratings lower than the senior certificates or are
non-rated. Holders of either the senior or the subordinated certificates will
ordinarily be entitled to a pro-rata share of distributions of principal and
interest. However, in the event that delinquencies and defaults on the
underlying mortgage loans cause a shortfall in the distributions to the senior
certificates, distributions otherwise payable to the subordinated certificates
will be distributed to the senior certificates to the extent required. The
characteristics of the mortgage loans and other credit enhancement features will
determine the size of the subordinated interest required to obtain the desired
rating on the senior securities.
To compensate for the greater risk of loss on, and illiquidity of, the
subordinated certificates, the yields on subordinated certificates are generally
substantially higher than those available on senior certificates. To the extent
that actual delinquency and loss experience is greater than anticipated, the
return on the subordinated certificates will be adversely affected and, in
extreme cases, all or a portion of the principal could be lost; to the extent
that such experience is more favorable than anticipated, the return on the
subordinated certificates will be increased.
Non-Diversification - As a non-diversified investment company, the Fund is
not subject to any statutory restriction under the 1940 Act with respect to
investing its assets in one or relatively few issuers. Non-diversification may
present greater risks for the Fund than in the case of a diversified company.
However, the Fund intends to qualify as a "regulated investment company" under
the Code. The Fund will be restricted in that at the close of each quarter of
the taxable year, at least 50% of the value of its total assets must be
represented by cash items (including receivables), U.S. Government securities,
regulated investment company securities and other securities, limited in respect
of any one issuer to not more than 5% in value of the total assets of the Fund
and to not more than 10% of the outstanding voting securities of such issuer. In
addition, at the close of each quarter of any taxable year, not more than 25% in
value of the Fund's total assets may be invested in securities (other than
securities of regulated investment companies or U.S. Government Securities) of
any one issuer or of two or more issuers which the Fund controls and which are
engaged in the same or similar or related trades or business. The limitations
described in this paragraph regarding qualification under the Code as a
"regulated investment company" are not fundamental policies and may be revised
to the extent applicable Federal income tax requirements are revised. (See
"Taxes" herein).
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The Fund's Board of Directors, which is responsible for the overall
management and supervision of the Fund, has employed Lend Lease Hyperion Capital
Advisors, L.L.C. to serve as investment adviser of the Fund. For information
about the Directors and Officers of the Fund, see "Management of the Fund" in
the Statement of Additional Information.
Investment Adviser
The Adviser provides advice to the Fund pursuant to an Investment Advisory
Agreement (the "Advisory Agreement"). Subject to such policies as the Board of
Directors of the Fund may determine, the Adviser makes investment decisions for
the Fund. The Adviser provides persons satisfactory to the Board of Directors of
the
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<PAGE>
Fund to serve as certain officers of the Fund. Such officers may be directors,
officers or employees of the Adviser or its affiliates. For its services under
the Advisory Agreement, the Adviser receives from the Fund a fee accrued and
paid monthly at an annual rate equal to 0.50% of the Fund's average weekly net
assets.
The Adviser is a limited liability company formed under the Delaware
Limited Liability Company Act and provides investment advisory, administrative,
distribution, financial and clerical services to clients whose principal
investment objective is to invest in CMBS. The Adviser is owned equally by Lend
Lease Real Estate and Hyperion Capital Management, Inc. The Fund's primary
day-to-day investment management decisions will be made by an investment
committee, and no one person is primarily responsible for making recommendations
to that committee. Information regarding the Fund's performance is set forth in
the Fund's Annual Report, which will be available without charge, upon request,
from the Fund.
Lend Lease Real Estate is an indirect wholly-owned subsidiary of Lend
Lease Corporation Limited, an integrated real estate and financial services
company established in 1958 as a New South Wales, Australia corporation. Listed
on the Australian and New Zealand stock exchanges, Lend Lease Corporation
Limited has substantial global interests operating in the United States, the
Asia-Pacific Region, South America and Europe, and also has a market
capitalization in excess of $4.9 billion as of December 31, 1998. Lend Lease
Corporation Limited has maintained an "AA" rating from Standard & Poor's since
1992. As of December 31, 1998, Lend Lease Corporation Limited's global real
estate investment management business has approximately $28.5 billion in real
estate assets under management on five continents.
Lend Lease Real Estate is a full service investment adviser with
experience in investing and managing commercial real estate assets for
institutional lenders and owners. According to Pensions & Investments, Lend
Lease Real Estate manages one of the largest portfolios in the United States of
real estate assets owned by pension plans and other tax exempt investors. Lend
Lease Real Estate has substantial experience in the origination and servicing of
whole loans, the acquisition and resolution of troubled loans and the management
of diverse real estate related assets. Lend Lease Real Estate is
co-headquartered in New York, New York and Atlanta, Georgia and has 13 regional
offices located throughout the United States. The firm's regional operations are
full service offices with accounting, valuation professionals, asset managers,
and acquisition and disposition specialists. The business address of Lend Lease
Real Estate is 3424 Peachtree Road., N.E., Suite 800, Atlanta, Georgia 30342-
1152.
In November 1999, Lend Lease Real Estate announced that it had reached an
agreement to buy five of AMERESCO, Inc.'s commercial mortgage businesses:
AMERESCO Capital Limited Partnership, Holiday Fenoglio Fowler, Real Estate
Structured Finance, AMERESCO Services Limited Partnership and Asset Management.
Hyperion Capital Management, Inc. ("HCM") is a wholly-owned subsidiary of
Hyperion Partners L.P. and also serves as Administrator of the Fund. Hyperion
Partners L.P. is a Delaware limited partnership which primarily seeks
investments in the financial services, housing and real estate industries and
assists in the development of the properties in which it invests. The sole
general partner of Hyperion Partners is Hyperion Ventures L.P., a Delaware
limited partnership ("Hyperion Ventures"). Corporations owned principally by
Lewis S. Ranieri, Salvatore A. Ranieri and Scott A. Shay are the general
partners of Hyperion Ventures. Lewis S. Ranieri, a former Vice-Chairman of
Salomon Brothers Inc., is the Chairman of the Board of the Adviser. Messrs.
Salvatore Ranieri and Shay are principally engaged in the management of the
affairs of Hyperion Ventures and its affiliated entities. Hyperion Capital
Management, Inc. and its affiliates, as of December 31, 1999 act as investment
managers for clients with assets in excess of $5 billion. The business address
of HCM is One Liberty Plaza, New York, New York 10006.
The Adviser provides persons satisfactory to the Fund's Board of Directors
to serve as officers of the Fund. Such officers, as well as certain other
employees and directors of the Fund, may be directors and officers of Lend Lease
Real Estate or HCM or their affiliates. The Statement of Additional Information
contains general
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<PAGE>
background information regarding each director and principal officer of the
Fund, In addition, the Adviser provides the Fund with the unique expertise of
its two owners. With respect to the Adviser, Lend Lease Real Estate's personnel
provide investment research, acquisition and asset management services to assist
the Adviser in underwriting, due diligence and portfolio management activities
with respect to the commercial real estate collateral underlying the Fund's
investments and provides the Adviser with personnel to perform real estate
evaluation services used in developing credit evaluation and pricing models. HCM
provides personnel to the Adviser to provide quantitative research, trading,
portfolio management, administration, compliance and finance services to the
Adviser in connection with its underwriting, due diligence and portfolio
management activities with respect to the securities in which the Fund may
invest. Further, HCM personnel provide quantitative modeling services to the
Adviser to assist in developing credit evaluation and pricing models.
Certain affiliates of the Adviser engage in real estate-related
activities, including but not limited to acting as the servicer of pools of
CMBS; underwriting and issuing CMBS; serving as market-maker of CMBS;
originating loans that underlie CMBS; acting as the borrowers of mortgages that
underlie CMBS; and purchasing CMBS for their own accounts or accounts over which
they have control. Because the 1940 Act prohibits certain affiliated
transactions involving the Fund and certain affiliates of the Fund, in the
absence of exemptive relief, the Fund may be prohibited from purchasing CMBS
with respect to which an affiliate of the Adviser acted in one or more of the
above capacities. The Adviser does not anticipate that this restriction will
have any significant adverse effect on its ability to manage the Fund. However,
the Adviser may seek exemptive relief to permit the Fund to engage in certain
transactions involving affiliates under conditions designed to eliminate or
minimize any potential conflict of interest. The Adviser intends to cause the
Fund (and any company controlled thereby) not to engage in any transaction that
would result in an affiliated person or promoter of or principal underwriter for
the Fund or any affiliated person of such a person, promoter, or principal
underwriter, acting as principal to be in violation of Section 17 of the 1940
Act. The Adviser understands that no affiliated person or promoter of or
principal underwriter for the Fund or any affiliated person of such a person,
promoter, or principal underwriter, has an obligation to seek or obtain any
exemptive order to facilitate such a transaction.
Administrator
Pursuant to an Administrative Services Agreement, the Administrator
supervises the overall administration of the Fund, including, among other
responsibilities, the negotiation of contracts and fees with, and the monitoring
of performance and billings of, the independent contractors and agents of the
Fund; the preparation and filing of all documents required for compliance by the
Fund with applicable laws and regulations; and arranging for the maintenance of
books and records of the Fund. Pursuant to its terms, the Sub-Administration
Agreement between the Administrator and Investors Capital Services, Inc., a
Delaware corporation, will continue subject to the approval of the Fund's Board
of Directors. Investors Capital provides for, or assists the Administrator in
managing and supervising all aspects of, the general day-to-day business
activities and operations of the Fund other than investment advisory activities,
including custodial, transfer agency, dividend disbursing, accounting, auditing,
compliance and related services. For its administrative services to the Fund,
the Administrator receives a fee from the Fund at a rate equal, on an annual
basis, to 0.15% of the average weekly net assets of the Fund. The Administrative
Services Agreement may not be amended without the approval of the holders of
more than 75% of the shares of the Fund's Common Stock.
Expenses
The Fund will bear the expenses of this offering, which are not expected
to exceed $50,000, including legal and accounting fees and the costs of
preparing solicitation materials. In addition to the expenses to be paid to the
Adviser, Administrator, transfer agent, dividend paying agent and custodian
discussed within this private placement memorandum, the Fund will pay all other
ongoing expenses, including but not limited to legal fees, accounting fees for
preparation of financial statements and tax returns, annual audits, brokerage
commissions, transfer taxes and other clearing, settlement and transactional
charges, except that the Adviser undertakes to pay such ongoing expenses (other
than brokerage commissions, transfer taxes, clearing, settlement and
transactional
-25-
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<PAGE>
charges and other extraordinary items) to the extent that such expenses exceed
.75% of average daily net assets per annum.
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
In order to qualify as a regulated investment company for Federal income
tax purposes, the Fund must distribute at least 90% of its net investment income
for each fiscal year. "Net investment income," as used herein, includes all
dividends, interest, other ordinary income earned by the Fund on its portfolio
holdings and net short-term capital gains, net of the Fund's expenses. The Fund
may also distribute all or a portion of net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss), if any, at least
once annually. The Fund intends to distribute at least 90% of its net investment
income each year and to distribute enough of its net investment income and net
capital gains to avoid the 4% excise tax on undistributed amounts that will be
imposed if it fails to distribute at least 98% of such amounts. Subject to these
requirements, the Fund intends to distribute quarterly all or substantially all
of its net investment income to holders of the Fund's Common Stock. It is
expected that the initial dividend on shares of the Fund's Common Stock will be
declared to holders of the Fund's Common Stock on the 1st day of the fiscal
quarter which follows the first fiscal quarter in which an investor (other than
the Adviser or an affiliate of the Adviser) becomes a holder of the Fund's
Common Stock. The initial dividend will then be paid on the 15th day of such
quarter.
Reinvestment of Dividends
A shareholder may elect to receive dividends and capital gain
distributions either in cash or in additional shares of the Fund. Unless
otherwise specified in writing by a shareholder, all dividends and capital gain
distributions will be paid on the payment date in cash. An election may be
changed by notifying the Fund in writing at any time prior to the record date
for a particular dividend or distribution. There are no sales or others charges
in connection with the reinvestment of dividends and capital gains
distributions. There is no fixed dividend rate, and there can be no assurance
that the Fund will pay any dividend or capital gains distributions. Dividends
and capital gain distributions will be taxable to shareholders whether received
in cash or reinvested in additional shares of the Fund.
Notices as to the source or sources from which any dividend is paid, if
not paid from net investment income, will be provided in accordance with Section
19(a) of the 1940 Act. A final liquidating distribution to shareholders of the
net assets of the Fund will be made on, or before, the termination of the Fund.
- --------------------------------------------------------------------------------
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value per Share will be determined monthly as of 3 p.m. (New
York time) on the last day on which the New York Stock Exchange is open in each
month. For purposes of determining the net asset value per Share, the value of
the Fund's assets (less the Fund's liabilities) will be divided by the number of
outstanding Shares. See the Statement of Additional Information for a discussion
of the methodology used to value the Fund's assets.
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274828.19
<PAGE>
- --------------------------------------------------------------------------------
CAPITAL STOCK OF THE FUND
- --------------------------------------------------------------------------------
Description of Shares,
Voting Rights and Liabilities
The Fund was incorporated in Maryland on September 12, 1995. The
authorized capital stock consists of one hundred million shares of common stock
having a par value of one-tenth of one cent ($.001) per share.
Shares have no preference, preemptive, conversion or similar rights. Each
share has equal voting, dividend, distribution and liquidation rights. Shares
when issued are fully paid and non-assessable, except as set forth below.
Shareholders are entitled to one vote for each share held on matters on which
they are entitled to vote. The Fund is not required, and has no current
intention, to hold annual meetings of shareholders, although the Fund will hold
special meetings of shareholders when in the judgment of the Board of Directors
it is necessary or desirable to submit matters for a shareholder vote.
Shareholders also have under certain circumstances (e.g., upon application and
submission of certain specified documents to the Board of Directors by a
specified number of shareholders) the right to remove one or more Directors of
the Fund. Shareholders also have the right to remove one or more Directors
without a meeting by a declaration in writing by a specified number of
shareholders. Upon liquidation or dissolution of the Fund, shareholders would be
entitled to share pro rata in the net assets available for distribution to
shareholders.
The Fund's charter provides that the Fund will terminate automatically on
December 31, 2001 provided that the duration of the Fund may be extended for
successive one-year periods provided that each continuance is specifically
approved in advance by the holders of more than 75% of the shares of the Fund's
Common Stock. In the event either Clifford E. Lai or Thomas H. Mattinson ceases
his affiliation with the Adviser and its affiliates, the Fund will automatically
terminate, unless otherwise extended by the approval of more than 75% of the
outstanding shares of the Fund's Common Stock. Notwithstanding the foregoing,
the Fund may be liquidated at any time upon the unanimous consent of the
shareholders. In connection with such termination, the Fund will liquidate all
of its assets and distribute to shareholders the net proceeds therefrom in cash
after making appropriate provisions for any liabilities of the Fund. The
foregoing provisions of the Fund's charter are governed by the laws of the State
of Maryland and not the 1940 Act.
On September 12, 1995, the predecessor to Lend Lease Hyperion Capital
Advisors, L.L.C. purchased $100,000 of the Fund's Shares at an initial
subscription price of $10.00 per share. Based on the foregoing share ownership,
the vote of the Adviser may be determinative of the outcome of any matters
submitted to the vote of the shareholders of the Fund. As of the date of the
Private Placement Memorandum, Lend Lease Hyperion Capital Advisors, L.L.C. owned
of record and beneficially 10,000 shares, constituting 100% of the outstanding
shares, and thus, until the offering of the shares is completed, Lend Lease
Hyperion Capital Advisors, L.L.C. will continue to control the Fund. Prior to
its termination and liquidation, the Fund intends to have at all times greater
than 100 beneficial owners of its securities.
Certain individuals will each be gifted 10 shares of Common Stock by
affiliates of the Adviser in order for the Fund to maintain more than 100
beneficial owners of its securities. Generally, such individuals will be
employees of HCM or Lend Lease Real Estate, both affiliates of the Adviser, and
are being gifted the Common Stock to enable the Fund to qualify as an investment
company. Such individuals, individually and collectively, will have no ability
to control or determine any corporate action of the Fund that requires
shareholder approval in light of the relative amount of the stock held by such
persons.
Annual and other meetings may be required with respect to such additional
matters relating to the Fund as may be required by the 1940 Act, any
registration of the Fund with the Securities and Exchange Commission or any
state, or as the Directors may consider necessary or desirable. Each Director
serves until the next meeting
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<PAGE>
of the shareholders called for the purpose of considering the election or
reelection of such Director or of a successor to such Director, and until the
election and qualification of his or her successor, elected at such a meeting,
or until such Director sooner dies, resigns, retires or is removed by the vote
of the shareholders.
For further information with respect to the Fund and the shares offered
hereby, reference is made to the Fund's registration statement filed with the
Securities and Exchange Commission, including the exhibits thereto. The
Registration Statement and the exhibits thereto may be examined at the
Commission and copies thereof may be obtained upon payment of certain
duplicating fees.
The Fund may offer additional shares. Other offerings of the Fund's
shares, if made, will require approval of its Board of Directors and approval by
the holders of more than 75% of the outstanding shares of the Fund's Common
Stock. Any additional offering will be subject to the requirement of the 1940
Act that shares may not be sold at a price below the then current net asset
value, exclusive of sales loads, except in connection with an offering to
existing shareholders or with consent of the holders of more than 75% of the
outstanding shares of the Fund's Common Stock.
Discretionary Tender Offers and Repurchase Offers
The Board of Directors may elect to periodically redeem Shares of the Fund
in the manner described herein or as it otherwise may be permitted under
applicable laws. Commencing eighteen months after the date of the offering of
the Fund's Shares and periodically thereafter, the Board of Directors of the
Fund may elect to make discretionary repurchase offers to all Fund shareholders.
Pursuant to a discretionary repurchase offer, the Fund will repurchase the
Shares for cash at the net asset value including accrued income not yet declared
as dividends determined on the repurchase pricing date and will pay the holders
of the Fund's Shares by the repurchase payment deadline, unless the repurchase
offer is suspended or postponed.
Beginning eighteen months after this offering, the Fund's Board of
Directors may consider at any time repurchases of Shares or a tender offer for
cash at net asset value including accrued income not yet declared as dividends
for all or a portion of the outstanding Shares. Under certain circumstances, it
is possible that periodic purchases of, or tender offers for, the Fund's Shares
may cause a deemed dividend distribution under the Code as defined herein to the
remaining shareholders of the Fund. Each such tender offer is subject to
approval by the Board of Directors. Subject to the Fund's fundamental policy
with respect to leverage, the Fund may borrow to finance repurchases or tenders.
See "Investment Policies" and "Investment Restrictions." Interest on any such
borrowings will reduce the Fund's net income.
Because of the nature of the Fund's investment objectives, policies and
portfolio, the Adviser does not anticipate that repurchases and tenders should
interfere with the ability of the Fund to manage its investments in order to
seek its investment objectives, and does not anticipate any material difficulty
in borrowing money or disposing of portfolio securities to consummate share
repurchases and tenders.
If a tender offer is made, it is the announced policy of the Board of
Directors of the Fund, which may be changed by the Board of Directors, not to
accept tenders or effect repurchases if (1) such transactions, if consummated,
would impair the Fund's status as a regulated investment company under the Code
(i.e., it would make the Fund a taxable entity, causing the Fund's income to be
taxed at the corporate level in addition to the taxation of shareholders who
receive dividends from the Fund); (2) the Fund would not be able to borrow money
or liquidate portfolio securities in an orderly manner to fund such purchases
without creating a negative impact on the net asset value of the Fund to the
detriment of non-tendering shareholders; or (3) there is, in the Board of
Directors' judgment, (a) any material legal action or proceeding, instituted or
threatened, challenging such transaction or otherwise materially adversely
affecting the Fund, (b) a declaration of a banking moratorium by federal or
state authorities or any suspension of payment by banks generally in the United
States or New York State, (c) a material limitation affecting the Fund or the
issuers of its portfolio securities imposed by federal or state authorities on
the extension of credit by lending institutions, (d) the commencement of war,
armed hostilities or other international or national calamity directly or
indirectly involving the United States or (e) any other events
-28-
274828.19
<PAGE>
or conditions which would have a material adverse effect on the Fund or its
shareholders if shares were repurchased. The Board of Directors may modify these
conditions in light of experience.
Any tender offer made by the Fund will be at net asset value per share
(including accrued income not yet declared as dividends) determined at the close
of business on the day the offer ends, and will be made in such manner as may be
determined by the Board of Directors in compliance with the Securities Exchange
Act of 1934, the rules promulgated thereunder and other applicable laws and
regulations. Shareholders will be notified of such tender offer by publication
or mailing or both. As of the close of business each day during the offer, the
Fund will calculate its net asset value and make its calculation available to
shareholders at the telephone number specified in the offering statement. When a
tender offer is authorized by the Fund's Board of Directors, a shareholder
wishing to accept the offer will be required to tender all of the Shares owned
by such shareholder (or attributed to the shareholder for Federal income tax
purposes under Section 318 of the Code) (the "Tender Shares"). Failure by a
shareholder to tender all such Shares could result in adverse tax consequences
of such shareholder and all other shareholders. The Fund will purchase Tender
Shares in accordance with the terms of the offer unless it determines to accept
none of them (based upon one of the conditions of the tender offer as summarized
above). Costs associated with the tender offer will be charged against capital.
Tender Shares that have been accepted and purchased by the Fund will be
held in its treasury until reissued by the Board of Directors. Treasury shares
will be recorded and reported as an offset to shareholders' equity and
accordingly will reduce the Fund's aggregate assets. If Treasury shares are
retired, issued and outstanding Shares and capital in excess of par will be
reduced.
Limited Transferability of Shares
The Fund does not intend to list its Shares on a stock exchange and
therefore it is not anticipated that a market for the Shares will develop. The
transfer of any such Shares will be done at the then current net asset value of
the Fund's Shares and may only be sold under an exemption from the registration
requirements of the Securities Act because the Fund's Shares have not been
registered under the Securities Act. The availability of such exemption is
dependent, in part, upon the "investment intent" of each new investor and the
suitability of such an investment for him.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
The following summary reflects the existing provisions of the Code and
other relevant federal income tax authorities applicable to U.S. citizens and
residents and U.S. domestic corporations, partnerships, trusts and estates, as
of the date of this Private Placement Memorandum. The federal income tax
consequences described below do not deal with the federal income tax
consequences applicable to investors subject to special rules, such as banks,
non-U.S. investors, insurance companies and dealers in securities. A shareholder
in the Fund should consult his or her own tax adviser concerning these matters.
The Fund intends to qualify and to elect to be treated as a regulated
investment company for federal income tax purposes for its taxable year
beginning August 1, 1999. To qualify as a regulated investment company, the Fund
must distribute annually to shareholders at least 90% of its investment company
taxable income (which includes, among other items, dividends, taxable interest
and the excess of net short-term capital gains over net long-term capital
losses), and meet certain diversification of assets, source of income, and other
requirements of the Code. If the Fund does qualify and elect, it will not be
subject to Federal income tax on the portion of its investment company taxable
income (including any net capital gain) it distributes to shareholders in a
timely manner, but will be subject to Federal income tax on any undistributed
income, and to an additional tax on
-29-
274828.19
<PAGE>
undistributed income if the ownership of the Fund is concentrated and the Fund
is therefore treated as a personal holding company. If the Fund does not meet
all of these Code requirements, it will be taxed as an ordinary corporation and
its distributions will generally be taxed to shareholders as ordinary income. In
determining the amount of net capital gains to be distributed, any capital loss
carryover from prior years will be applied against capital gains to reduce the
amount of distributions paid.
Amounts, other than tax-exempt interest, not distributed on a timely basis
in accordance with a calendar year distribution requirement may be subject to a
nondeductible 4% excise tax. To prevent imposition of the excise tax, the Fund
must distribute for the calendar year an amount equal to the sum of (1) at least
98% of its ordinary income (excluding any capital gains or losses) for the
calendar year, (2) at least 98% of the excess of its capital gains over capital
losses (adjusted for certain ordinary losses) for the one-year period ending
October 31 of such year, and (3) all ordinary income and capital gain net income
(adjusted for certain ordinary losses) for previous years that were not
distributed during such years.
Distributions to shareholders attributable to the Fund's interest income
(including original issue discount and market discount), other items of ordinary
income, and net short-term capital gains are taxable as ordinary dividend
income. It is not anticipated that any of such dividends will qualify for the
dividends received deduction for corporate shareholders. Capital gain dividends,
which are designated as distributions of net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss, if any), are
taxable as long-term capital gains, regardless of how long the Shares have been
held by the shareholder. The taxation of capital gains is discussed below. All
distributions are taxable to the shareholder whether reinvested in additional
shares or received in cash. Shareholders will be notified annually as to the
Federal tax status of distributions. Shareholders receiving distributions in the
form of additional shares will have a cost basis for Federal income tax purposes
in each share received equal to the net asset value of a share of the Fund on
the reinvestment date.
Investors should be careful to consider the tax implications of buying
shares just prior to a distribution by the Fund. The price of shares purchased
at that time includes the amount of the forthcoming distribution. Distributions
by the Fund reduce the net asset value of the Fund's shares, and if a
distribution reduces the net asset value below a stockholder's cost basis, such
distribution, nevertheless, would be taxable to the shareholder as ordinary
income or capital gain as described above, even though, from an investment
standpoint, it may constitute a partial return of capital.
Dividends and distributions are generally taxable to the shareholders at
the time the dividend or distribution is made. Any dividend declared by the Fund
in October, November or December of any calendar year, however, which is payable
to shareholders of record on a specified date in such a month and which is not
paid on or before December 31 of such year, will be treated as received by the
shareholders as of December 31 of such year, provided that the dividend is paid
during January of the following year.
Upon the taxable disposition (including a sale or redemption) of shares of
a Fund, a shareholder may realize a gain or loss, depending upon its basis in
the shares. The gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands, and will be long-term if
the shareholder's holding period for the shares is more than 12 months.
Non-corporate shareholders are subject to tax at a maximum rate of 20% on
long-term capital gains (10% if the taxpayer is, and would be after accounting
for such gains, subject to the 15% tax bracket for ordinary income). Long-term
capital gains of corporate taxpayers are currently taxed at the same rates
applicable to ordinary income. A loss realized by a shareholder on the
disposition of Fund shares with respect to which capital gain dividends have
been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. Further, a loss realized on a disposition will be disallowed to
the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss. The
deductibility of capital losses is subject to limitations.
-30-
274828.19
<PAGE>
The amount and character of the taxable income or tax loss of the Fund
will depend upon the application of a number of complex and/or uncertain aspects
of Federal income tax law. In particular, certain securities issued or acquired
by the Fund (including regular interests in real estate mortgage investment
conduits, may be treated as having original issue discount ("OID") for Federal
income tax purposes. A security will be treated as having OID if its stated
redemption price at maturity exceeds its issue price by more than a statutory de
minimis amount. In the case of any security treated as having OID, the Fund
would be required to accrue a portion of the OID daily as interest income even
though it would not actually receive the cash payment of such income until a
later period. A similar problem may arise with respect to residual interests in
a real estate mortgage investment conduit.
Other securities acquired by the Fund may be acquired at a market
discount. A security is purchased at a market discount when, subject to a
statutory de minimis exception, it is purchased after the original issue at a
price below the stated redemption price at maturity. Any gain from the
disposition of a security that was originated after July 18, 1984 and acquired
by the Fund at a market discount will be treated as ordinary income to the
extent the gain does not exceed the accrued market discount. Holders of market
discount securities are required to include as ordinary income any partial
principal payment on the loan, to the extent such payment does not exceed the
accrued market discount on such security, even if the holder eventually disposes
of the security prior to maturity at a loss. The Administration's fiscal year
2000 budget proposal would have required that market discount be included in
income currently.
Certain of the options, futures contracts, and forward foreign currency
exchange contracts in which the Fund may invest are so-called "section 1256
contracts." With certain exceptions, realized gains or losses on section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses ("60/40"). Also, section 1256 contracts held by the Fund at the
end of each taxable year (and, generally, for purposes of the 4% excise tax, on
October 31 of each year) are "marked-to-market" with the result that unrealized
gains or losses are treated as though they were realized and the resulting gain
or loss is treated as 60/40 gain or loss.
Generally, the hedging transactions undertaken by the fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
timing and character of gains (or losses) realized by the Fund. Losses realized
by the Fund on a position that is part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. The hedging
transaction may increase the amount of short-term capital gain realized by the
Fund.
The Fund is required to report to the Internal Revenue Service ("IRS") all
distributions to shareholders, except in the case of certain exempt
shareholders. Distributions by the Fund (other than distributions to exempt
shareholders) are generally subject to withholding of Federal income tax at a
rate of 31% ("backup withholding") if (1) the shareholder fails to furnish the
Fund with and to certify the shareholder's correct taxpayer identification
number or social security number, (2) the IRS notifies the Fund or a shareholder
that the shareholder has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or (3) when required
to do so, the shareholder fails to certify that he or she is not subject to
backup withholding. If the withholding provisions are applicable, any such
distributions (whether reinvested in additional shares or taken in cash) will be
reduced by the amounts required to be withheld. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that he or she is not otherwise subject to back-up withholding. An individual's
taxpayer identification number is his or her Social Security number.
Back-up withholding is not an additional tax and may be credited against a
taxpayer's federal income tax provided the shareholder provides the necessary
information.
Individual shareholders will be required to gross up their dividends from
the Fund by their share of the investment expenses incurred by the Fund, which
expenses will be allowable deductions for individual
-31-
274828.19
<PAGE>
shareholders only to the extent such expenses, together with other miscellaneous
itemized deductions of the shareholder, exceed 2% of the shareholder's adjusted
gross income.
Dividends and capital gains distributions may also be subject to state,
local and foreign taxes.
Shareholders who are not United States citizens or residents should be
aware that distributions from the Fund will generally be subject to a
withholding tax of 30%, or a lower treaty rate, and should consult their own tax
advisers to determine whether investment in the Fund is appropriate.
Entities that generally qualify for an exemption from Federal income tax,
such as many pension trusts, are nevertheless taxed on "unrelated business
taxable income." A tax-exempt entity's dividend income from the Fund and gain
from the sale of shares in the Fund or the Fund's sale of securities should not
constitute unrelated business income to such tax-exempt entity unless the
acquisition of the share itself is debt-financed or constitutes dealer property
in the hands of the tax-exempt entity, or (and to the extent that) the Fund owns
residual interests in a REMIC.
Before investing in the Fund, the trustee or investment manager of an
employee benefit plan (e.g., a pension or profit sharing retirement plan) should
consider among other things (a) whether the investment is prudent under the
Employee Retirement Income Security Act of 1974 ("ERISA"), taking into account
the needs of the plan and all of the facts and circumstances of the investment
in the Fund; and (b) whether the investment satisfies the diversification
requirement of Section 404(a)(1)(C) of ERISA.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations thereunder presently in effect.
These provisions are subject to change by legislative or administrative action,
and any such changes may be effective either prospectively or retroactively.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning federal, state and local income tax matters.
- --------------------------------------------------------------------------------
VALIDITY OF SHARES
- --------------------------------------------------------------------------------
The validity of the Shares offered hereby will be passed on for the Fund
by Battle Fowler LLP, 75 East 55th Street, New York, New York 10022.
- --------------------------------------------------------------------------------
EXPERTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP serves as the independent accountants for the
Fund and audits its annual financial statements.
- --------------------------------------------------------------------------------
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send unaudited quarterly reports and audited annual reports,
including a list of investments held, to shareholders.
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<PAGE>
- --------------------------------------------------------------------------------
FURTHER INFORMATION
- --------------------------------------------------------------------------------
The Private Placement Memorandum and the SAI do not contain all of the
information set forth in the Registration Statement that the Fund has filed with
the Securities and Exchange Commission. The complete Registration Statement may
be obtained from the Securities and Exchange Commission upon payment of the
prescribed fee or inspected at the Securities and Exchange Commission's office
at no charge.
The Fund does not intend to hold annual meetings of shareholders, except
as may be required by applicable law. A special meeting of shareholders will be
called upon the Fund's receipt of the written request of the holders of at least
ten percent of the shares of the Common Stock of the Fund issued and outstanding
and entitled to vote at such meetings.
* * *
Investment Adviser
Lend Lease Hyperion Capital Advisors, L.L.C.
One Liberty Plaza
New York, New York 10006
Administrator
Hyperion Capital Management, Inc.
One Liberty Plaza
New York, New York 10006
Transfer Agent, Custodian and Accounting Agent
State Street Bank and Trust Company
2 Avenue De Lafayette
Boston, Massachusetts 02111
Placement Agent
Lend Lease Capital Markets, Inc.
3424 Peachtree Road, NE
Atlanta, Georgia 30326
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274828.19
STATEMENT OF ADDITIONAL INFORMATION
February__, 2000
LEND LEASE HYPERION HIGH-YIELD CMBS FUND, INC.
One Liberty Plaza, New York, New York 10006
(212) 549-8400
This Statement of Additional Information sets forth information which
may be of interest to investors but which is not necessarily included in the
Fund's Private Placement Memorandum, dated January __, 2000 (the "Private
Placement Memorandum"), through which shares of the Fund are offered. This
Statement of Additional Information should be read in conjunction with the
Private Placement Memorandum, a copy of which may be obtained by a qualified
investor without charge by calling 1-(800) Hyperion.
The Statement of Additional Information is NOT a private placement
memorandum and is authorized for distribution to prospective investors only if
preceded or accompanied by the Private Placement Memorandum.
Table of Contents Page
1. THE FUND.........................................2
2. INVESTMENT OBJECTIVE, POLICIES, RISKS
AND RESTRICTIONS.............................2
3. DETERMINATION OF NET ASSET VALUE;
VALUATION OF PORTFOLIO SECURITIES............4
4. TAX STATUS.......................................4
5. MANAGEMENT OF THE FUND ..........................5
6. COUNSEL AND INDEPENDENT ACCOUNTANTS ............10
7. PORTFOLIO TRANSACTIONS..........................10
8. DESCRIPTION OF SHARES, VOTING RIGHTS
AND LIABILITIES.............................11
9. FINANCIAL STATEMENTS............................12
10. DESCRIPTION OF RATINGS........................A-1
This Statement of Additional Information shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any jurisdiction in which such an offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any such jurisdiction.
299892.9
<PAGE>
1. THE FUND
Lend Lease Hyperion High-Yield CMBS Fund, Inc. (the "Fund"), is a
non-diversified, closed- end management investment company organized as a
corporation under the laws of the State of Maryland on September 12, 1995. Lend
Lease Hyperion Capital Advisors, L.L.C., the adviser of the Fund (the
"Adviser"), manages the investments of the Fund from day to day in accordance
with the Fund's investment objective and policies. The selection of investments
for the Fund and the way they are managed depend on the conditions and trends in
the economy and the financial marketplaces.
Hyperion Capital Management, Inc., the administrator of the Fund (the
"Administrator") supervises the overall administration of the Fund, including,
among other responsibilities, the negotiation of contracts and fees with, and
the monitoring of performance and billings of, the independent contractors and
agents of the Fund; the preparation and filing of all documents required for
compliance by the Fund with applicable laws and regulations; and arranging for
the maintenance of books and records of the Fund. The Board of Directors of the
Fund provides broad supervision over the affairs of the Fund.
2. INVESTMENT OBJECTIVE, POLICIES, RISKS AND RESTRICTIONS
Investment Objective
The investment objective of the Fund is to provide high total return
by investing in securities backed by real estate debt. There can, of course, be
no assurance that the Fund will achieve its investment objective. The investment
objective of the Fund is fundamental and may not be changed without approval by
the holders of more than 75% of the shares of the Fund's Common Stock.
Investment Policies
The Fund seeks to achieve its investment objective by investing, under
normal circumstances, at least 65% of its assets in below investment grade CMBS.
The following is intended only as a supplement to the information
contained in the Private Placement Memorandum and should be read only in
conjunction with the Private Placement Memorandum. Terms defined in the Private
Placement Memorandum and not defined herein have the same meanings herein as in
the Private Placement Memorandum.
Investment Restrictions
The Fund has adopted the following investment restrictions which may
not be changed without approval by the holders of more than 75% of the shares of
the Fund's Common Stock.
The Fund may not:
(1) Invest 25% or more of the value of the total assets of the Fund in
securities of issuers engaged in any one industry (excluding real estate and
related industries and U.S. Government securities as defined in the 1940 Act).
(2) Borrow Money. This restriction shall not apply to (i) issuing
senior securities in the form of indebtedness in the aggregate up to an amount
equal to 33 1/3% of the Fund's total assets (after giving effect to any such
leveraging) and (ii) hedging techniques described in the Private Placement
Memorandum which may be deemed to be borrowing.
299892.9
-2-
<PAGE>
(3) Pledge, hypothecate, mortgage or otherwise encumber its assets
other than to secure such borrowings as set forth in restriction No. 2 above or
in connection with, to the extent permitted under the 1940 Act, good faith
hedging transactions (including interest rate swaps), reverse repurchase
agreements, dollar roll agreements, when issued and forward commitment
transactions.
(4) Underwrite the securities of other issuers, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
(5) Invest in securities of other investment companies, except that
the Fund may purchase unit investment trust securities where such unit
investment trusts meet the investment objective of the Fund and then only up to
5% of the Fund's net assets, except as they may be acquired as part of a merger,
consolidation or acquisition of assets, but in no event to an extent not
permitted by Section 12(d) of the 1940 Act.
(6) Issue senior securities, except insofar as the Fund may be deemed
to have issued a senior security in connection with any permitted borrowing.
(7) Make loans of money or property to any person, except through
loans of portfolio securities to Qualified Institutions, the purchase of debt
obligations in which the Fund may invest consistent with the Fund's investment
objective and policies and investment restrictions or the temporary investment
in repurchase agreements with Qualified Institutions. The Fund may not lend
portfolio securities, if, as a result, the aggregate of such loans exceeds 33
1/3% of the value of the Fund's total assets (including such loans).
(8) Invest for the purpose of exercising control over management of
any company.
(9) Purchase real estate or interests therein (including limited
partnership interests but excluding Mortgage-Backed Securities, Stripped
Mortgage-Backed Securities and similar instruments and REIT Debt Securities) or
interests in oil, gas or mineral leases.
(10) Purchase or sell commodities, commodity contracts, options,
futures contracts, or options on futures contracts, except for hedging purposes.
(11) Make any short sale of securities except for short sales against
the box and short sales made in connection with hedging transactions.
(12) Purchase or retain any securities issued by an issuer, any of
whose officers or directors, trustees or security holders is an officer or
director of the Fund, or is an officer or director of the Adviser, if after the
purchase of the securities of such issuer by the Fund one or more of such
persons who individually owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, together own
beneficially more than 5% of such shares or securities, or both, all taken at
market value.
(13) Invest in CMBS where the underlying assets are non-dollar
denominated Commercial Mortgage Loans.
(14) Invest in any security that would cause any investor in the Fund
to be required to make a filing under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
Percentage and Rating Restrictions. If a percentage restriction or a
rating restriction on investment or utilization of assets set forth above or
referred to in the Private Placement Memorandum is adhered to at the time an
investment is made or assets are so utilized, a later change in percentage
resulting from changes in the value of the securities held by the Fund or a
later change in the rating of a security held by the Fund will not be considered
a violation of policy.
299892.9
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3. DETERMINATION OF NET ASSET VALUE;
VALUATION OF PORTFOLIO SECURITIES
The net asset value of each share of the Fund is determined as of the
time of 3 p.m. (New York time) on the last day of each month on which the New
York Stock Exchange is open for business (a "Pricing Day"). As of the date of
this Statement of Additional Information, the New York Stock Exchange is open
for business every weekday except for the following holidays (as observed): New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. This
determination of the net asset value of shares is made once during each Pricing
Day as of 3:00 p.m., New York time, by dividing the value of the Fund's net
assets (i.e., the value of its assets including accrued income less its
liabilities, including expenses payable or accrued) by the number of Fund Shares
outstanding in the Fund at the time the determination is made.
Pricing of Securities. A determination of value used in calculating
net asset value must be a fair value determination made in good faith by or on
behalf of the Fund's Board of Directors in accordance with procedures
established by such Board. While no single standard for determining fair value
exists, as a general rule, the current fair value of a security would appear to
be the amount which the Fund could expect to receive upon its current sale.
Some, but not necessarily all, of the general factors which may be considered in
determining fair value include: (i) the fundamental analytical data relating to
the investments; (ii) the nature and duration of restrictions on disposition of
the securities; and (iii) an evaluation of the forces which influence the market
in which these securities are purchased and sold. Without limiting or including
all of the specific factors which may be considered in determining fair value,
some of the specific factors include: type of security, financial statements of
the issuer, cost at date of purchase, size of holding, discount from market
value, value of unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as to any
transaction or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies, and other
relevant matters.
The Fund values CMBS and other debt securities on the basis of
valuations provided by dealers or by a pricing service, approved by the Fund's
Board of Directors, which uses information with respect to transactions in such
securities, quotations from dealers, market transactions in comparable
securities, various relationships between securities and yield to maturity in
determining value. Debt securities having a remaining maturity of sixty days or
less when purchased, and debt securities originally purchased with maturities in
excess of sixty days but which currently have maturities of sixty days or less
are valued at cost adjusted for amortization of premiums and accretion of
discounts.
4. TAX STATUS
The Fund intends to qualify and elect to be treated as a regulated
investment company for federal income tax purposes for its fiscal year ending
July 31, 2000 and it intends to do so for future fiscal years. In order to so
qualify, the Fund must, among other things, (a) derive in each taxable year at
least 90% of its gross income from dividends, interest, payments with respect to
loans of securities, gains from the sale or other disposition of securities or
other income derived with respect to its business of investing in such
securities (including, but not limited to, gains from options, futures or
forward contracts); and (b) diversify its holdings so that, at the end of each
fiscal quarter, (i) at least 50% of the value of the Fund's assets is
represented by cash, U.S. Government securities (as defined in the 1940 Act),
securities of other regulated investment companies, and other securities which,
with respect to any one issuer, do not represent more than 5% of the value of
the Fund's assets nor more than 10% of the voting securities of such issuer, and
(ii) not more than 25% of the value of the Fund's assets is invested in the
securities of any issuer (other than U.S. Government securities as defined in
the
299892.9
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<PAGE>
1940 Act or the securities of other regulated investment companies) or of two or
more issuers which the Fund controls and which are engaged in the same or
related trades or businesses. If the Fund qualifies as a regulated investment
company and satisfies a minimum distribution requirement, the Fund will not be
subject to federal income tax to the extent that it distributes its income to
its shareholders. The minimum distribution requirement is satisfied if the Fund
distributes as an ordinary income dividend at least 90% of its investment
company taxable income (generally net investment income and the excess of net
short-term capital gain over net long-term capital loss and computed without
regard to the deduction for dividends paid) for the taxable year. The Fund will
be subject to corporate income tax on undistributed income and to an additional
tax on any undistributed income if the ownership of the Fund is concentrated and
the Fund is therefore treated as a personal holding company.
The Fund may be subject to a nondeductible 4% excise tax which will be
imposed if, and to the extent that, the Fund does not distribute by the end of
each calendar year (or is not subjected to regular corporate tax in such year
on) an amount equal to the sum of (a) 98% of the Fund's ordinary income for such
calendar year; (b) 98% of the excess of capital gains over capital losses for
the one-year period ending on October 31 of each year; and (c) the undistributed
income and gains from the preceding years (if any) pursuant to the calculations
in (a) and (b). A distribution will be treated as having been paid on December
31 if it is declared by the Fund in October, November or December with a record
date in such month and is paid by the Fund in January of the following year.
Such distribution will be treated as received by the shareholders in the
calendar year in which the distribution is declared.
The Fund intends to engage in various hedging transactions. Under
various provisions of the Code, the result of such transactions may be to change
the character of recognized gains and losses, accelerate the recognition of
certain gains and losses, and defer the recognition of certain losses.
The Fund's taxable income will in most cases be determined on the
basis of reports made to the Fund by the issuers of the securities in which the
Fund invests. The tax treatment of certain securities in which the Fund may
invest is not free from doubt and it is possible that an Internal Revenue
Service examination of the issuers of such securities or of the Fund could
result in adjustments to the income of the Fund. An upward adjustment by the
Internal Revenue Service to the income of the Fund may result in the failure of
the Fund to satisfy the minimum distribution requirement described above.
The Fund's fiscal year end is July 31st.
5. MANAGEMENT OF THE FUND
The directors and officers of the Fund and their principal occupations
during the past five years are set forth below. Their titles may have varied
during this period. Asterisks indicate that those directors are "interested
persons" (as defined in the 1940 Act) of the Fund. Except for Kurt L. Wright and
Thomas H. Mattinson whose address is 3424 Peachtree Road, N.E., Suite 800,
Atlanta, Georgia 30326; Leo M. Walsh, Jr. whose address is 100 Parsons Pond
Drive, Franklin Lakes, New Jersey 07417; and Harald R. Hansen whose address is
Club Station Drive, Atlanta, Georgia 30319, the address of each director and
officer is One Liberty Plaza, New York, New York 10006.
299892.9
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<PAGE>
Officers and Directors of the Fund
Harald R. Hansen He served as chairman of First Union National
Director Bank of Georgia from January 1989 until his
retirement in September 1996. From January
1989 to April 1996 he also served as Chief
Executive Officer of First Union National
Bank of Georgia and prior to that he was
executive vice president in charge of the
General Banking Group of First Union National
Bank of Georgia. Mr. Hansen has been a
Director of Chastain Capital Corporation
since February 1998. Mr. Hansen serves as
chairman of the board of directors of the
United Way, chairman of the advisory board
for the School of Business at Clark Atlanta
University, Chairman of the Midtown Alliance
and the Chairman of the Atlanta Paralympics
Organizing Committee. In addition, he serves
on the board of directors of the Atlanta
Symphony, the High Museum of Art in Atlanta,
the Woodruff Arts Center, the Southern Golf
Association, the Georgia State University
School of Business and the Fuqua School of
Business at Duke University. Mr. Hansen has
received numerous honors including the
Distinguished Service Award from the Atlanta
Business League and the Minority Business
Advocate of the Year from the Minority
Business Development Agency in Atlanta. Mr.
Hansen earned a bachelor's degree from Duke
University and served in the U.S. Naval
Reserve, the U.S. Marine Corps and is a
retired colonel in the U.S. Marine Corps
Reserve. Age 68.
Leo M. Walsh, Jr. Director and/or Trustee of several investment
Director (Chairman of companies advised by Hyperion Capital
the Audit Committee) Management, Inc. or by its affiliates
(1989-Present). Financial Consultant for
Merck-Medco Managed Care L.L.C. (formerly
Medco Containment Services Inc.)
(1994-Present). Financial Consultant for
Synetic Inc., a manufacturer of porous
plastic materials for health care uses
(1989-1990); President, WW Acquisition Corp.
(1989-1990); Senior Executive Vice President
and Chief Operating Officer of The Equitable
Life Assurance Society of the United States
("The Equitable") (1986-1988); Director of
The Equitable and Chairman of Equitable
Investment Corporation, a holding company for
The Equitable's investment oriented
subsidiaries (1983-1988); Chairman and Chief
Executive Officer of EQUICOR-Equitable HCA
Corporation (1987- 1988). Age 67.
299892.9
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<PAGE>
*Kurt L. Wright Mr. Wright has been Executive Vice President
Director and Chairman of Lend Lease Real Estate since April 1997
of the Board and currently heads Lend Lease Real Estate's
Mortgage Debt and Public Markets Group, which
is responsible for all CMBS, loan
originations and securitization and
high-yield investing. Mr. Wright also has
been Chief Executive Officer of Chastain
Capital since its inception. From 1995 to
1997, he was Senior Vice President
responsible for portfolio management for the
Buckhead Strategic Fund series. From 1993 to
1995, Mr. Wright was a Vice President
responsible for mortgage research, product
development and marketing activities within
the Mortgage Investors Group. From 1990 to
1993, he performed real estate market
analyses and ad hoc review of client
portfolios while a member of ERE's Investment
Research Department and is a member of the
Investment Committee of ERE Rosen, LLC, a
REIT securities manager with $500 million of
assets under management. From 1988 to 1990,
he was a Senior Analyst for the Prudential
Realty Group, from 1985 to 1987 he was
Treasurer and Controller of Morgan Stanley
Real Estate Inc. and from 1981 to 1984 he was
an accountant for Deloitte, Haskins & Sells
specializing in real estate. Mr. Wright is a
Chartered Financial Analyst and a Certified
Public Accountant, and is a member of the
Editorial Board of Real Estate Capital
Markets Report and the Research Committee of
the National Council of Real Estate
Investment Fiduciaries. Mr. Wright has a BA
from Colgate University, an MS from New York
University and an MBA from Columbia
University. Age 40.
Clifford E. Lai President (since December 1998) and Chief
President Investment Officer, Hyperion Capital
Management, Inc. (March 1993-Present).
President of several investment companies
advised by Hyperion Capital Management, Inc.
or by its affiliates (1993-Present). Formerly
Managing Director and Chief Investment
Strategist for Fixed Income, First Boston
Asset Management (1989-1993); Vice President,
Morgan Stanley & Co. (1987-1989). Age 46.
Thomas H. Mattinson Mr. Mattinson, a Senior Vice President of
Senior Vice President Lend Lease Real Estate, has been with Lend
Lease Real Estate since November 1995 and
currently heads Lend Lease Real Estate's CMBS
and structured finance investment groups.
Previously, he was responsible for acquiring
and managing high-yield commercial mortgages
and equities on behalf of the Buckhead
Strategic Fund. He also was formerly
associated with EQ Services, an Equitable
Real Estate affiliate, from 1992 to 1995, and
oversaw resolution of $500 million of
non-performing loans and real estate
obligations. From 1990 to 1992, Mr. Mattinson
was employed at Heller Financial to manage
commercial mortgages and liquidate
non-performing mortgages and real estate. At
CARTER, formerly Carter & Associates, worked
as a Financial Analyst. Mr. Mattinson has a
BA in both Real Estate/Urban Land Economics
and Finance from Southern Methodist
University. Age 34.
299892.9
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<PAGE>
Thomas F. Doodian Chief Operating Officer (since December 1998)
Treasurer and Assistant and Director of Finance and Operations,
Secretary Hyperion Capital Management, Inc. (July 1995-
November 1998). Treasurer of several
investment companies advised by Hyperion
Capital Management, Inc. (February
1998-Present). Formerly, Vice President in
Mortgage Backed Trading at Mabon Securities
Corporation (1994-1995); fixed income
analyst, trader, and Vice President and
Controller at Credit Suisse First Boston
(1984-1994). Age 40.
Joseph Tropeano Vice President and Compliance Officer of
Secretary and Assistant Hyperion Capital Management, Inc. (December
Treasurer 1993-Present). Formerly Senior Compliance
Examiner and Staff Accountant with the
investment management section of the
Securities & Exchange Commission's northeast
regional office (1988- 1993). With Merrill
Lynch from 1980 to 1988. Age 38.
299892.9
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<PAGE>
DIRECTORS' COMPENSATION TABLE
(Estimated for the year ended July 31, 2000)
<TABLE>
<CAPTION>
====================================================================================================================================
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual from Fund and
Name of Person Compensation from Accrued as Part of Benefits upon Fund Complex
Fund Fund Expenses Retirement Paid to Directors
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leo M. Walsh $5,000 None None $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
Harald R. Hansen $5,000 None None $5,000
====================================================================================================================================
</TABLE>
Each Director, who is not an interested person of the Fund, receives
annual fee of $5,000 which is paid by the Fund.
Adviser
Lend Lease Hyperion Capital Advisors, L.L.C. (the "Adviser") manages
the Fund pursuant to an Investment Advisory Agreement (the "Advisory
Agreement"). Subject to such policies as the Board of Directors of the Fund may
determine, the Adviser makes investment decisions for the Fund. The Adviser
furnishes at its own expense all facilities and personnel necessary in
connection with providing these services.
The Advisory Agreement was initially approved by the Fund's initial
shareholders on September 22, 1995. The Advisory Agreement was most recently
approved by the Fund's board of directors, including a majority of the directors
who are not parties to the agreement or interested persons of any such party (as
such term is defined in the 1940 Act) effective January 1, 2000. The Advisory
Agreement will continue in effect for a period of two years from its effective
date, and if not sooner terminated, will continue in effect for successive
periods of 12 months thereafter, provided that each continuance is specifically
approved at least annually by both (1) the vote of a majority of the Fund's
board of directors and the vote of the holders of more than 75% of the
outstanding shares of the Fund's Common Stock and (2) by the vote of a majority
of the directors who are not parties to such Agreement or interested persons (as
such term is defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated as a whole at any time by the Fund, without the
payment of any penalty, upon the vote of a majority of the Fund's Board of
Directors or a majority of the outstanding voting securities of the Fund on 60
days' written notice to the Adviser or by the Adviser on 60 days' written notice
to the Fund. The Agreement will terminate automatically in the event of its
assignment (as such term is defined in the 1940 Act and the rules thereunder).
The Advisory Agreement provides that neither the Adviser nor its
personnel shall be liable for any error of judgment or mistake of law or for any
loss arising out of any investment or for any act or omission in its services to
the Fund, except for willful misfeasance, bad faith, gross negligence or
reckless disregard of its or their obligations and duties under the Advisory
Agreement. The Advisory Agreement provides that the Adviser may render services
to others.
The Fund's Private Placement Memorandum contains additional
information regarding the Adviser and a description of fees payable to the
Adviser for services under the Advisory Agreement.
299892.9
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<PAGE>
Administrator
Pursuant to the Administrative Services Agreements, the Administrator
provides the Fund with general office facilities and supervises the overall
administration of the Fund; including, among other responsibilities, the
negotiation of contracts and fees with, and the monitoring of performance and
billings of, the independent contractors and agents of the Fund; the preparation
and filing of all documents required for compliance by the Fund with applicable
laws and regulations; and arranging for the maintenance of books and records of
the Fund. Pursuant to its terms, the Sub-Administration Agreement between the
Administrator and Investors Capital Services, Inc., a Delaware corporation, will
continue subject to the approval of the Fund's Board of Directors. Investors
Capital provides for, or assists the Administrator in managing and supervising
all aspects of, the general day-to-day business activities and operations of the
Fund other than investment advisory activities, including custodial, transfer
agency, dividend disbursing, accounting, auditing, compliance and related
services. The Administrator provides persons satisfactory to the Board of
Directors of the Fund to serve as officers of the Fund. Such officers may be
directors, officers or employees of the Administrator or its affiliates. The
Administrative Services Agreement may not be amended without the approval of the
holders of more than 75% of the outstanding shares of the Fund's Common Stock.
The Fund's Private Placement Memorandum contains a description of the
fees payable to the Administrator under the Administrative Services Agreement.
The Administrative Services Agreement was approved by the Fund's Board of
Directors effective November 5, 1999 and terminates automatically if it is
assigned and may be terminated without penalty by majority vote of the
shareholders of the Fund in the case of the Fund or by either party on not more
than 60 days' nor less than 30 days' written notice.
Transfer Agent, Custodian and Accounting Agent
The Fund has entered into a Transfer Agent and Registrar Services Fee
Agreement with State Street Bank & Trust Company ("State Street") which acts as
transfer and accounting agent for the Fund. Pursuant to a Custodian Agreement,
State Street also acts as the custodian of the Funds's assets. For its services,
the Custodian will receive compensation as may from time to time be agreed upon
by it and the Fund. The Fund's transfer and accounting agent and custodian do
not assist in, and are not responsible for, investment decisions involving
assets of the Fund.
6. COUNSEL AND INDEPENDENT ACCOUNTANTS
Legal matters in connection with the issuance of shares of stock of
the Fund are passed upon by Messrs. Battle Fowler LLP. __________________ are
the independent accountants for the Fund, providing audit services, tax return
preparation, and assistance and consultation with respect to the preparation of
filings with the Securities and Exchange Commission.
7. PORTFOLIO TRANSACTIONS
The Fund's purchases and sales of securities usually are principal
transactions. Securities are normally purchased directly from the issuer or from
an underwriter or market maker for the securities. There usually are no
brokerage commissions paid for such purchases and, therefore, the Fund does not
anticipate paying brokerage commissions on its securities purchases, although it
may pay such commissions on futures transactions. Any transaction for which the
Fund pays a brokerage commission will be effected at the best price and
execution available. Purchases from underwriters of securities include a
commission or concession paid by the issuer to the
299892.9
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<PAGE>
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price.
Allocation of transactions, including their frequency, to various
dealers is determined by the Adviser in its best judgment and in a manner deemed
to be in the best interest of the investors in the Fund rather than by any
formula. The primary consideration is prompt execution of orders in an effective
manner at the most favorable price.
Investment decisions for the Fund will be made independently from
those for any other account or investment company that is or may in the future
become managed by the Adviser or its affiliates. If, however, the Fund and other
investment companies or accounts managed by the Adviser are contemporaneously
engaged in the purchase or sale of the same security, the transactions may be
averaged as to price and allocated equitably to each account. In some cases,
this policy might adversely affect the price paid or received by the Fund or the
size of the position obtainable for the Fund. In addition, when purchases or
sales of the same security for the Fund and for other investment companies
managed by the Adviser occur contemporaneously, the purchase or sale orders may
be aggregated in order to obtain any price advantages available to large
denomination purchases or sales. Furthermore, in certain circumstances
affiliates of the Adviser whose investment portfolios are managed internally,
rather than by the Adviser, might seek to purchase or sell the same type of
investments at the same time as the Portfolio. Such an event might also
adversely affect the Fund.
8. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The authorized capital stock of the Fund, which was incorporated on
September 12, 1995 in the State of Maryland, consists of one hundred million
shares of stock having a par value of one tenth of one cent ($.001) per share.
Each share when issued will have identical voting rights, equal dividend,
distribution and liquidation rights and each fractional share has those rights
in proportion to the percentage that the fractional share represents of a whole
share. Shares will be voted in the aggregate. There are no conversion or
preemptive rights in connection with any shares of the Fund. All shares, when
issued in accordance with the terms of the offering, will be fully paid and
nonassessable. On September 12, 1995, the predecessor of Lend Lease Hyperion
Capital Advisers, L.L.C. purchased $100,000 of the Fund's shares at an initial
subscription price of $10 per share.
The shares of the Fund have non-cumulative voting rights, which means
that the holders of more than 50% of the shares outstanding voting for the
election of directors can elect 100% of the directors if the holders choose to
do so, and, in that event, the holders of the remaining shares will not be able
to elect any person or persons to the Board of Directors. The Fund will not
issue certificates evidencing Fund shares.
As a general matter, the Fund will not hold annual or other meetings
of the Fund's shareholders. This is because the By-Laws of the Fund provide for
annual meetings only if the following actions require shareholder approval under
the 1940Act: (a) election of directors, (b) approval of revised investment
advisory contracts with respect to a particular class or series of stock, (c)
approval of revisions to the Fund's distribution agreement with respect to a
particular class or series of stock, (d) ratification of the selection of
independent public accountants, and (e) upon the written request of holders of
shares entitled to cast not less than 25% of all those votes entitled to be cast
at such meeting. Annual and other meetings may be required with respect to such
additional matters relating to the Fund as may be required by the 1940 Act,
including the removal of Fund directors(s) and communication among shareholders,
any registration of the Fund with the Securities and Exchange Commission or any
state, or as the Directors may consider necessary or desirable. Each Director
serves until the next meeting of the shareholders called for the purpose of
considering the election or reelection of such Director or of a successor to
such Director, and until the election and qualification of his or her successor,
elected at such meeting, or until such Director sooner dies, resigns, retires or
is removed by the vote of the shareholders.
299892.9
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9. FINANCIAL STATEMENTS
The following unaudited Statement of Assets and Liabilities and
Statement of Operations reflect the financial performance of the Fund as of
December 31, 1999. All of the Fund's current assets reflect the initial
contribution of the Adviser and the income thereon.
Lend Lease Hyperion High-Yield
CMBS Fund, Inc.
Statement of Assets and Liabilities
As of December 31, 1999
(Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments, at value (Cost...$123,000) $ 123,000.00
Cash 68.14
Interest Receivable 375.84
Prepaid Expenses 77,870.74
Deferred Organization Expenses -
Other Assets -
---------------------
Total Assets $ 201,314.72
---------------------
Liabilities:
Due to Advisor $ -
Investment Advisory Fee Payable -
Administration Fee Payable -
Interest Payable 77,870.74
---------------------
Total Liabilities $ 77,870.74
---------------------
Net Assets: $ 123,443.98
=====================
Capital Stock, at par $ 10.00
Additional Paid-In Capital 99,990.00
Undistributed Net Investment Income 23,443.98
Accumulated Net Realized Losses -
Net Appreciation -
---------------------
Net Assets Applicable to Capital Stock Outstanding $ 123,444.98
=====================
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Lend Lease Hyperion High-Yield
CMBS Fund, Inc.
Statement of Operations
For The Five Months Ended December 31, 1999
(Unaudited)
- --------------------------------------------------------------------------------
Investment Income:
Interest $ 2,389.17
-----------------
Investment Income:
Investment Advisory Fees -
Administration Fees -
-----------------
Total Operating Expenses -
Interest Expense -
-----------------
Total Expenses -
-----------------
Net Investment Income $ 2,389.17
-----------------
Realized and Unrealized Gains (Losses) on Investments -
Short Sales, Futures and Options:
Net Realized Gains (Losses): $ -
Net Change in Unrealized Appreciation -
-----------------
Total Realized and Unrealized Gains Losses $ -
-----------------
Net Increase in Net Assets Resulting from Operations
$ 2,389.17
=================
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10. DESCRIPTION OF RATINGS
APPENDIX A
Description of Moody's Investors Service, Inc.'s
Below Investment Grade Debt Ratings:
Ba -- Securities which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes securities in this class.
B -- Securities which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Securities which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with respect
to principal or interest.
Ca -- Securities which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Securities which are rated C are the lowest rated class of
securities by Moody's Investors Service and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
NR -- Indicates that the Security is not rated.
Con-Securities for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
debt obligations secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operating experience, (c) rentals which begin
when facilities are completed, or (d) payments to which some other limiting
condition attaches. Rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B (i.e., two categories below Baa) in its
securities rating system. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category, the modifier 2 indicates a
mid-range ranking, and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
Description of Standard & Poor Corporation's
Below Investment Grade Debt Ratings:
BB, B, CCC, CC -- Securities rated BB, B, and CCC are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation. While such securities will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
299892.9
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<PAGE>
C, CI -- The C rating is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC - Debt rating. The CI rating is
reserved for income securities on which no interest is being paid.
D -- Securities rated D are in default, or are expected to default
upon maturity or payment date, and payment of interest and/or repayment of
principal is in arrears
Provisional Ratings -- (Prov.) following a rating indicates the rating
is provisional, which assumes the successful completion of the project being
financed by the issuance of the securities being rated and indicates that
payment of debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, which
addresses credit quality subsequent to completion, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion.
Accordingly, the investor should exercise his own judgment with respect to such
likelihood and risk.
Plus (+) or Minus (-): The ratings from AA to CCC (i.e., three
categories below BBB) may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
NR: Securities may lack a S&P rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because S&P does not rate a particular type of obligation as a matter of
policy.
Description of Fitch Investors Service, Inc.'s
Below Investment Grade Debt Ratings:
BB: Securities are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Securities are considered highly speculative. While securities in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Securities have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Securities are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Securities are in imminent default in payment of interest or
principal.
DDD, DD, and D: Securities are in default on interest and/or principal
payments. Such securities are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. 'DDD' represents the highest potential for recovery on these
securities, and 'D' represents the lowest potential for recovery.
Plus (+) or Minus (-): The ratings from AA to C (i.e. five categories
below BBB) may be modified by the addition of a plus or minus sign to indicate
the relative position of a credit within the rating category.
NR: Indicates that Fitch does not rate the specific issue.
299892.9
A-2
<PAGE>
Conditional: A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
Description of Duff & Phelps Credit Rating Co.'s
Below Investment Grade Debt Ratings:
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP: Preferred stock with dividend arrearages.
Plus (+) or Minus (-): The ratings from AA to C (i.e. five categories
below BBB) may be modified by the addition of a plus or minus sign to indicate
the relative position of a credit within the rating category.
Notes with Respect to All Ratings:
Securities which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal that are similar to the risks of
lower-rated securities. The Fund is dependent on Fund management's judgment,
analysis and experience in the evaluation of such securities.
Investors should note that the assignment of a rating to a security by
a rating service may not reflect the effect of recent developments on the
issuer's ability to make interest and principal payments.
299892.9
A-3
<PAGE>
The cross-reference sheet is incorporated by reference to
the Cross-Reference Sheet to the Registration Statement on Form N-2 dated
September 22, 1995.
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(1) (a) Statement of Assets and Liabilities
(b) Statement of Operations as of December 31, 1999
(2) Exhibits
*(a) Articles of Incorporation, as amended, of the
Registrant. (Articles of Incorporation filed as
Exhibit 1 to Registration Statement on Form N-2
dated September 22, 1995 and incorporated
herein by reference.)
*(b) By-Laws, as amended, of the Registrant.
(By-Laws filed as Exhibit 2 to Registration
Statement on Form N-2 dated September 22, 1995
and incorporated herein by reference.)
(c) Not applicable.
(d) Not applicable.
(e) Not Applicable.
*(g) Investment Management Contract between the
Registrant and Lend Lease Hyperion Capital
Advisors, L.L.C.
(h) Not applicable.
(i) Not applicable.
*(j) [Custodian Contract and Transfer Agent and
Registrar Services Fee Agreement between the
Registrant and State Street Bank & Trust
Company.]
*(k) Administrative Services Agreement between
the Registrant and Lend Lease Hyperion Capital
Advisors, L.L.C.
(l) Not Applicable.
*(m) Written assurance of Lend Lease Hyperion
Capital Advisers, L.L.C. that its purchase of
shares of the registrant was for investment
purposes without any present intention of
redeeming or reselling.
(n) Not Applicable.
(o) Not Applicable.
- --------
* To be filed by Amendment.
275060.2
<PAGE>
(p) Not Applicable.
(q) Not Applicable.
(r) Not Applicable.
Item 25. Marketing Arrangements.
Not Applicable.
Item 26. Other Expense of Issuance and Distribution.
The following table sets forth the estimated expenses in
connection with the issuance and distribution of the securities covered by this
Registration Statement:
Securities and Exchange Commission fee........... $ [1,000.00]
Accountants' fees and expenses................... [-0-]
Blue Sky fees and expenses....................... [-0-]
Cost of Stock Certificates....................... [-0-]
Printing....................................... [5,000.00]
Marketing expenses............................. [35,000.00]
Legal fees and expenses.......................... [50,000.00]
Miscellaneous.................................. [9,000.00]
Total.......................................... [$100,000.00]
Item 27. Persons controlled by or Under Common Control
with Registrant.
None.
Item 28. Number of Holders of Securities.
Number of Record Holders
Title of Class as of January , 2000
--------------- ------------------------
Shares of Common Stock [ ]
Item 29. Indemnification.
In accordance with Section 2-418 of the General
Corporation Law of the State of Maryland, Article NINTH of the
Registrant's Articles of Incorporation provides as follows:
"NINTH: (1) The Corporation shall indemnify (i) its
currently acting and former directors and officers, whether
serving the Corporation or at its request any other entity, to
the fullest extent required or permitted by the General Laws
of the State of Maryland now or hereafter in force, including
the advance of expenses under the procedures and to the
fullest extent permitted by law, and (ii) other employees and
agents to such extent as shall be authorized by the Board of
Directors or the By-Laws and as permitted by law. Nothing
contained herein shall be construed to protect any director or
officer of the Corporation against any liability to the
275060.2
<PAGE>
Corporation or its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. The foregoing rights of
indemnification shall not be exclusive of any other rights to
which those seeking indemnification may be entitled. The Board
of Directors may take such action as is necessary to carry out
these indemnification provisions and is expressly empowered to
adopt, approve and amend from time to time such by-laws,
resolutions or contracts implementing such provisions or such
indemnification arrangements as may be permitted by law. No
amendment of the charter of the Corporation or repeal of any
of its provisions shall limit or eliminate the right of
indemnification provided hereunder with respect to acts or
omissions occurring prior to such amendment or repeal.
(2) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, and the Investment
Company Act of 1940, no director or officer of the Corporation
shall be personally liable to the Corporation or its
stockholders for money damages; provided, however, that
nothing herein shall be construed to protect any director or
officer of the Corporation against any liability to the
Corporation or its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. No amendment of the
charter of the Corporation or repeal of any of its provisions
shall limit or eliminate the limitation of liability provided
to directors and officers hereunder with respect to any act or
omission occurring prior to such amendment or repeal."
In Section 7 of the Distribution Agreement relating to the
securities being offered hereby, the Registrant agrees to
indemnify Equitable Real Estate Hyperion High-Yield Commercial
Mortgage Fund, Inc. and any person who controls Equitable Real
Estate Hyperion High-Yield Commercial Mortgage Fund, Inc.,
within the meaning of the Securities Act of 1933, against
certain types of civil liabilities arising in connection with
the Registration Statement or Prospectus.
Insofar as indemnification for liabilities arising
under the Securities Act of 1933 (the "Securities Act") may be
permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than a
payment by the Registrant of expenses incurred or paid by a
director, officer or the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by
it is against public policy as expressed in the
275060.2
<PAGE>
Securities Act and will be governed by the final adjudication
of such issue.
Insofar as the Investment Company Act of 1940 may be
concerned, in the event that a claim for indemnification is
asserted by a director, officer or controlling person of the
Registrant in connection with the securities being registered,
the Registrant will not make such indemnification unless (i)
the Registrant has submitted, before a court or other body,
the question of whether the person to be indemnified was
liable by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of duties, and has obtained
a final decision on the merits that such person was not liable
by reason of such conduct or (ii) in the absence of such
decision, the Registrant shall have obtained a reasonable
determination, based upon a review of the facts, that such
person was not liable by virtue of such conduct, by (a) the
vote of a majority of directors who are neither interested
persons as such term is defined in the Investment Company Act
of 1940, nor parties to the proceeding or (b) an independent
legal counsel in a written opinion.
The Registrant will not advance attorneys' fees or
other expenses incurred by the person to be indemnified unless
the Registrant shall have (i) received an undertaking by or on
behalf of such person to repay the advance unless it is
ultimately determined that such person is entitled to
indemnification and one of the following conditions shall have
occurred: (x) such person shall provide security for his
undertaking, (y) the Registrant shall be insured against
losses arising by reason of any lawful advances or (z) a
majority of the disinterested, non-party directors of the
Registrant, or an independent legal counsel in a written
opinion, shall have determined that based on a review of
readily available facts there is reason to believe that such
person ultimately will be found entitled to indemnification.
Item 30. Business and Other Connections of Investment Adviser.
The description of the Lend Lease Hyperion Capital Advisors,
L.L.C. under the caption "Management of the Fund" in the Prospectus and
"Management and Investment Management Contract" in the Statement of Additional
Information constituting parts A and B, respectively, of the Registration
Statement are incorporated herein by reference.
Registrant's investment adviser, Lend Lease Hyperion Capital
Advisors, L.L.C., is a registered investment adviser. Lend Lease Hyperion
Capital Advisors, L.L.C.'s investment advisory clients include Lend Lease
Hyperion Mortgage Opportunity Fund, Inc., a registered investment company whose
address is One Liberty Plaza, New York, New York 10006, which invest principally
in commercial mortgage-backed securities.
Item 31. Location of Accounts and Records.
Accounts, books and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained in the physical possession of Registrant at Lend Lease
Hyperion Capital Advisors, L.L.C., One Liberty Plaza, New York, New York 10006
the Registrant's Manager; State Street Bank
275060.2
<PAGE>
and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, the
Registrant's transfer agent, custodian and accounting agent.
Item 32. Management Services.
Not Applicable.
Item 33. Undertakings.
Not Applicable.
275060.2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of
1940, the Registrant has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, the 31st day of
January, 2000.
LEND LEASE HYPERION HIGH-YIELD
CMBS FUND, INC.
By: /S/ JOSEPH TROPEANO
-----------------------------------
Name: Joseph Tropeano
275060.2
<PAGE>
Exhibit Index
*(a) Articles of Incorporation, as amended, of the
Registrant.
*(b) By-Laws, as amended, of the Registrant.
(c) Not Applicable.
(d) Not Applicable.
(e) Not Applicable.
(f) Not Applicable.
*(g) Investment Management Contract between the
Registrant and Lend Lease Hyperion Capital Advisors,
L.L.C.
(h) Not Applicable.
(i) Not Applicable.
*(j) [Custodian Contract and Transfer Agent and
Registrar Services Fee Agreement between the Registrant
and State Street Bank & Trust Company.]
*(k) Administrative Services Agreement between the
Registrant and Lend Lease Hyperion Capital Advisors,
L.L.C.
(l) Not Applicable.
*(m) Written assurance of Lend Lease Hyperion Capital
Advisers, L.L.C. that its purchase of shares of the
registrant was for investment purposes without any
present intention of redeeming or reselling.
(n) Not Applicable.
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable.
(r) Not Applicable.
- -------------
* To be filed by Amendment.
275060.2
